US inflation makes case for cautious Fed - ING

Rob Carnell, Chief International Economist at ING, suggests that the US headline inflation falls to 0.8%YoY from 1.0%YoY in July which suggests Fed will not hike in September.

Key Quotes

“US headline CPI remained unchanged in July, in line with downbeat expectations following a soft PPI figure last Friday. The annual rate of inflation dipped down to 0.8%YoY in July from 1.0%YoY in June. The story for the core rate of inflation was not much better. Core inflation shed 0.1pp on the month to fall to an annual rate of 2.2%YoY.

Within the breakdown, housing and rentals remain stronger than the headline, with rents growing at 3.3%YoY. Medical care is also an outlier with inflation here running at 4.0%YoY, and tobacco also bucking the low headline trend with inflation of 2.9%YoY.

But most other components remain very weak. Overall goods prices (commodities) are falling at 2.5% YoY, and non-housing related service prices also remain weak. That service price weakness probably reflects ongoing soft wages growth.

But for the members of the FOMC, this is another reading that shouts a message for continued caution with respect to the pace and timing further rate hikes. Despite some further good news from the labour market, we see little case for a September rate hike, which suggests that a December hike is the best chance for a hike this year, and our forecast remains that the next hike will not be until 1Q2017.”