US inflation unexpectedly dipped in August, falling below the market consensus figure on both the headline and core readings. Headline CPI rose 2.7% year on year down from 2.9%prior and below the expected 2.8%. Meanwhile, core inflation was also weak printing 2.2%, down from both the prior and expected reading of 2.4%.
Apparel Drags Prices Down
The breakdown of the data shows that the declines were mainly fuelled by historic declines in apparel prices which fell 1.6% over the month. Reductions were also seen in medical care and recreation which fell 0.2% and 0.1% respectively. Medical care costs hit their lowest levels since February 2015 which explains some of the weakness seen in August PCE given medical costs’ more significant weighting in the PCE basket.
Energy Remains Strong
The highest positive contribution came once again from the energy which rose 1.9% while further positive contributions seemed among the food and core services components. Energy (0.3%), utility gas services (0.9%) and gasoline (3%) all recovered from the weakness seen in June and July.
Disappointingly, core goods prices fell back into negative territory in August (-0.3%) marking its most significant monthly drop since March 2017 after briefly moving out of deflationary territory last month for the first time since 2016.
While core CPI at 2.2% is the lowest reading in four months, fuelling some USD sell-off, it is still consistent with core PCE sticking near to the Fed’s 2% target and barring any further inflation weakness, should keep the Fed on course to raise rates an additional two times this year in September and December.
The fall in USD has seen price moving firmly back below the 95.10 level putting the focus on the run down to deeper support at the 91 to 91.84 region, which was a major support level in 2016 and 2017, with the rising trend line from 2014 lows coming in around the same area.