US: Inflation surprises to the upside in August – UOB

UOB Group’s Senior Economist Alvin Liew and Rates Strategist Victor Yong review the latest release of US inflation figures.

Key Takeaways

“US headline consumer price index (CPI) inflation was off from recent highs but still elevated at 8.3% y/y (from 8.5% y/y in Jul), above Bloomberg estimates of 8.1% (but in line with our forecast). On a m/m basis, the headline CPI picked up pace, increasing 0.1% m/m  (versus flat at 0% in Jul) and faster against Bloomberg estimate of a decline by -0.1% m/m.”

“A bigger concern was the core CPI inflation (which excludes food and energy) which raced higher sequentially, reflecting unabating underlying momentum for price pressures. On a m/m basis, core inflation rose by a faster 0.6% in Aug (up from 0.3% in Jul, and above Bloomberg estimate of 0.3%). Compared to a year ago, it rose to 6.3% y/y in Aug, from 5.9% in Jul, and above Bloomberg estimate for 6.1%.”

“Goods inflation eased further, coming in at -0.8% m/m, 12.1% y/y in Jul (from -0.5% m/m, 12.1% y/y in Jul), but services inflation – a bigger and thus more important component of CPI – continued to increase and the pace re-accelerated, up by 0.7% m/m, 6.8% y/y (from 0.3% m/m, 6.2% y/y in Jul), matching the previous high of Oct 1982 (6.76% y/y). The sustained increase in services inflation in recent months is a clear indication that wage growth is having a meaningful transmission to price pressures.”

“While the latest US headline inflation was below the 9.1% recorded in Jun, this reflected mainly the decline in gasoline prices but the cost of living is still materially high as shown by the persistent rise of food and shelter costs and services inflation is getting hotter amidst strengthening demand. We maintain our headline CPI inflation forecast to average 8.5% and our core CPI inflation forecast at 6.5% for 2022. Subsequently, we still expect both headline and core inflation to ease in 2023, but it will likely average higher at 3.0% (from previous forecast of 2.5%). The balance of risk on inflation remains on the upside.”