US CPI August Preview: Inflation gets demoted, again

• Federal Reserve inflation averaging puts prices on the back burner.
• Annual core CPI forecast to be unchanged in August.
• Retail sales have rebounded from their pandemic collapse but price pressure remains weak.

The Federal Reserve’s new averaging approach to consumer prices has placed inflation dead last in its list of policy concerns.  By promising to let prices rise above the 2% target long enough to produce an acceptable average the Fed governors hope to prevent speculative higher interest rates should inflation unexpectedly return.

Fed policy remains fixed, as it has been for the decade since the financial crisis and reinforced by the pandemic, on economic growth and the labor market.  At no point since 2008 has rising inflation threatened to evoke a policy response from the FOMC. That record is most unlikely to change.   

CPI

Consumer prices are expected to rise 0.3% in August, half the July increase.  The annual gain is forecast to be 1.2%, up from 1.1% in July.  Core prices are projected to be up 0.2% on the month in August from 0.6% in July and to be unchanged at 1.6% on the year.

Core CPI, annual

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The pandemic collapse in demand and its impact on consumer prices is well documented. Overall monthly CPI fell 0.4% in March, 0.8% in April and 0.1% in May.  The 0.6% gain in June and July and the expected 0.3% increase in August represents a return to standard price levels rather than an increase in underlying inflation.

Annual inflation has the same trajectory. From 2.3% in February to 1.5% in March, 0.3%in April and 0.1% in May, then 0.6% in June and 1.1% in July and 1.2% in August.

Core monthly inflation fell from 0.2% in February to -0.4% in April and then 0.2%in June and 0.6% in July. The 0.2% forecast for August is a return to normality. Annual core CPI had less variation: 2.4% in February, a low of 1.2% in May and then 1.6% in July where it is expected to remain in August.

Consumer prices have reversed the temporary pandemic plunge in prices and assumed an essentially normal prospect.

Retail sales and GDP

Retail sales have more than replaced their lockdown plummet. Overall sales have jumped 27.8% from May to July more than overcoming the 22.9% fall in the prior two months. Control group sales which enter in the government’s GDP calculation are up 17.5% after falling 12.4% in April. 

Retail sales control group

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That is the largest reason for the resurgence in US GDP currently estimated at 30.8% annualized in the third quarter by the Atlanta Fed after its 31.7% drop in the Covid marred second quarter.

Conclusion and the dollar

The artificial decline and rebound in prices around the pandemic has played out.  The Fed’s notice on inflation, whether CPI or its preferred PCE measure, removes inflation from the near and medium term policy mix.  Employment and wages would have to be securely at their levels before the spring collapse before the Fed governors would return inflation to the active consideration. Even then, only if it’s average had met the 2% target. 

Traders will note that inflation is not, for the foreseeable future, a market event.