US CPI Preview: Stable and secondary

• Headline CPI inflation expected to be unchanged, core higher
• Inflation secondary for Fed policy
• Fed funds rate cut forecast regardless of price changes

The Bureau of Labor Statistics will release its consumer price index (CPI) for August on Thursday September 12^th at 12:30 GMT, 8:30 EDT.

Forecast

The consumer price index is predicted to rise 0.1% in August following July’s 0.3% gain. Annual inflation is expected to be stable at 1.8%.  The core rate is projected to increase 0.2% after a 0.3% rise in July. The yearly rate will climb to 2.3% in August from 2.2% in July.

Federal Reserve mandates and monetary policy

Chairman Powell has repeatedly said that the goal of Fed policy to maintain the economic expansion, as of July the longest on record, and to retain and expand the benefits of a tight labor market in employment and wages.

The first of the central bank’s two Congressional mandates is to maintain ‘maximum employment.” By any standard a 3.7% jobless rate and 3.2% annual wage gains fulfill that instruction.

The Fed’s second mandate, ‘price stability’ was conceived a generation ago when unchecked inflation, 12% and more in the late 1970’s was the chief threat to the economic well-being of the country.  The unqualified success of monetary policies based on inflation targets has made price changes far less of an economic consideration. Whether inflation is running at 1.5% or 2.3% is largely irrelevant to economic growth.

It is doubtful that monetary policy is able to fine tune inflation within 0.5% of a specific target.  The mandate for price stability and the Fed’s own inflation target of 2% are goals that have been essentially achieved.  As long inflation expectations in the economy are stable, the central bank can turn its policies to other goals.

US inflation

Over the past eight years US inflation has been remarkably consistent. 

Since January 2011 core CPI has varied from less than one point from 1.6% to 2.4%.  For the 103 months through July the core CPI average is 1.924%. The 12-month moving average has moved from 0.892% in February 2011 to2.20% in January 2017.  If the one starts in January 2012 the range is 1.683% to 2.20%. 

Reuters

The headline rate has been more volatile ranging from 3.9% in September 2011 to -0.2% in April 2015, but the average is an equally calm 1.787%. The 12-month moving average varies from 3.342% in March 2012 to 0.125% in December 2015.

The core PCE rate, the Fed’s chosen inflation measure has been even more circumspect. The range has been 2.1% to 1.2% with the average since January 2011 at 1.623%. The 12-month moving average has moved from 1.183% in May 2011 to 1.967% in January 2019.

Reuters

The producer price index which measures price changes in domestic production has ranged from 4.4% in 2011 to -1.4% in 2015.  Since January 2017 the volatility has contracted to 1.7% to 3.4%.

The core range has been 3.0% to 0.2%.  The most pertinent economic point is that the much larger volatility in producer prices has not been transferred to consumers. Manufacturers and retailers have not passed on their own inflation to customers. Immediate profits have been sacrificed to retain market share. 

The 0.1% rise in August PPI and the 0.3% increase in core PPI do not indicate any unusual pricing pressures ascending through the production chain.

Fed policy and inflation

The central bank’s attention to inflation has been largely rhetorical.

Whether the price change rate is higher or lower the governors say that they anticipate that over time the rate will be symmetric around the target. Generally that has been true. Their deeper concern is for inflation expectations which have been slowly declining.

Next week’s FOMC is widely expected to cut the fed funds rate by 0.25% but the rationale is not inflation based.  The Fed’s current rate policy is not price dependent, to paraphrase a favorite quote of the policymakers.

Sustaining the US expansion and maintaining the labor market’s contribution to social good is the bank’s focus.

If CPI and by extension PCE are weaker than expected, the rate cut will be said to serve a dual purpose. If inflation is higher than anticipated it will be ignored. Either way the policy and market impact will be minimal.

 

The core PCE index for August will be issued on September 27^th.