CPI Subdued, Fed Uncertainty Rises

The consumer price index printed below expectations on Friday, adding to a recent spate of disappointing economic readings. CPI rose 0.1% month-over-month and 1.7% year-over-year, while core CPI, which excludes food and energy prices, increased at the same pace. CPI is the broadest of the three price measures from the U.S. Labor Department because it includes all goods and services. Detractors to July’s print included the price of lodging away from home, which fell a record 4.2% month-over-month, and new vehicle prices, which dropped 0.5%, the largest decline since 2009. The weakness in these categories reflects falling prices at hotels and motels as well as the recent softness in auto sales. Shelter costs increased 0.1 percent in July, its smallest increase since March, while owners-equivalent rent rose 0.3 percent month-over-month. 

The weak reading on inflation adds uncertainty to the Federal Reserve’s tightening path. Policy makers have forecasted one additional rate hike for 2017, which would move the federal funds rate to 1.375%, a slight increase from the current range of 1.0% to 1.25%. The market discounted the likelihood of this hike on Friday, with the probability for a rate increase in December falling to 33.6%, down from 38.1% a day prior. To date the Fed has downplayed the weakness in inflation as transitory and has chosen to look through the data as they’ve raised rates. But as inflation continues to miss their 2% target, it remains to be seen whether the committee will continue to look through the weakness, or will push out the expectation for another rate hike into 2018.  

Source: Bloomberg