August CPI: GOOD OR BAD?

At 8:30 EST September 13, BLS released August CPI figures. Headline CPI is 3.7%, higher than forecast of 3.6% and an increase of 0.5% from last month. Core CPI is 4.3%, met expectation and is 0.4% lower than last month. So is it bad or good?

YoY figures are just terrible to use when compared with last month due to base effect. To answer the question of is this month better than last month, we need to look at MoM inflation figures. So Headline CPI MoM is 0.6% due to increase in gas price and Core CPI MoM is 0.3%, 0.1% higher than expectation. We know that 0.2% MoM is good and 0.4% MoM is bad but what about 0.3%?

Before this CPI print, Fed overall is quite happy with the progress because both June and July printed 0.2% MoM Core CPI, or roughly 2.4% annualized. However, 0.3% MoM is an equivalent of 3.6% annualized inflation which is higher than what the Fed target is. So it is fair to say that August inflation result is not great.

The key driver for higher MoM Core CPI is transportation service: Vehicle repair (1.1%), Vehicle insurance (2.4%) and Airline Fare (4.9%). It is unlikely the first two component is going to decrease anytime soon, at least not until P&C insurers start improving on their profitability, by then, premiums might start stabilizing. On the other hand, Airline Fare is quite volatile. As long as consumers continue to drain their savings, travel will start slowing down and put less pressure on airflight tickets.

Besides transportation services, other service components and housing continue to show disinflation as expected. In fact, if we look at Core CPI 3-month annualized, last time we saw 2.4% was back in early 2021. In summary, August figure is not great due to volatile airline tickets while the overall disinflation trend is still intact and Fed is likely to look beyond recent surge in energy price.