US: Firmer core inflation supportive of December rate hike - Wells Fargo

According to analysts from Wells Fargo,  today’s CPI report shows that inflation pressures, while still relatively tame, are building.

Key Quotes:

“CPI inflation rose 0.2 percent in August despite flat prices for food and energy. A surge in medical costs pushed the core index up 0.3 percent, although gains were widespread among other core categories.”

“For the first time in months, energy prices were a non-factor on the headline. Another 0.5 percent rise in electricity prices helped to offset a 0.9 percent decline in gasoline prices. Energy prices should be a much smaller headwind on the CPI in the next few months. On a year-over-year basis, AAA gasoline prices are down only 6 percent, the smallest one-year decline since the autumn of 2014.”

“While the CPI has seen the sharpest increase in medical inflation as more healthcare costs get pushed directly on to consumers, medical care prices have been heating up in other inflation measures. The PPI for the healthcare services index also jumped in August, bringing the year-ago rate to more than a two year high. With the PPI for healthcare used in the BEA’s monthly estimates of the PCE deflator, we expect to see a similar bump in the Fed’s preferred measure of core inflation later this month. All three price indices point to an end in the disinflationary trend in healthcare prices that has been a key factor in low core inflation.”

“The softer readings from the ISM indices, retail sales, industrial production and hiring over the past few weeks has made a clearer argument for a data dependent Fed holding off on raising rates at its meeting next week. However, today’s CPI report shows that inflation pressures, while still relatively tame, are building. With core prices trending up, we still look for the Fed to squeeze in one rate hike this year at its December meeting.”