August CPI: Dog days of summer

Summary

The heat continues to gradually get turned up on inflation. Consumer prices in August came in a bit hotter than expected, with the CPI rising 0.4% versus consensus expectations for a 0.3% rise. Excluding food and energy, prices advanced 0.346%—in line with the consensus on a rounded basis but also a little stronger on an unrounded basis.

Goods inflation continued to pick up, posting its largest monthly gain since January. The initial burst of higher prices following increased tariffs this spring seemed to fade slightly in some categories like recreational goods and household furnishings, but a jump in vehicle prices over the month illustrated that upward pressure on goods prices from tariffs won't feed into consumer prices in a uniform fashion. It is also not just higher goods prices lifting inflation. Core services advanced 0.35% in August amid a rebound in travel-related prices and owners' equivalent rent.

For the FOMC, a core CPI reading of 0.35% and a three-month annualized rate of 3.6% is not what the Committee wants to see as it prepares to cut rates for the first time in 10 months. That said, as we have highlighted elsewhere, the downside risks to the labor market have grown considerably over the past couple of months, creating more urgency to act to keep the jobs market from falling apart. The FOMC also may take comfort in the more benign PCE inflation implications from today's CPI report and yesterday's PPI report. Taken together, we project that the PCE and core PCE deflators rose 0.26% and 0.22%, respectively, in August.

We suspect the broadening cost burden from tariffs will keep the monthly pace of goods inflation elevated through early next year, but the spillover into services inflation should be limited by the weakness in the jobs market, choosier consumers and anchored inflation expectations. As such, today's print does not alter our expectation for the Fed to cut by 25 bps at its September meeting next week and by 75 bps total by year-end.

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