US Inflation Slows in August... Possible Reignition by Year-End

by Paek Jongmin

Published 14 Sep.2021 22:24(KST)

CPI rose 0.3% month-on-month... Core CPI up 0.1%
Increase smaller than expected
Used car prices down, new car prices up... Reflecting supply chain shortages
Full-scale rent hikes could trigger rapid inflation surge
Focus on June 21 FOMC tapering decision impact

[Image source=AP Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The US Consumer Price Index (CPI) for August rose slightly less than expected, but the level of inflation continued to soar. Attention is focused on whether this result will influence the Federal Open Market Committee (FOMC) meeting next week regarding the decision on asset purchase tapering.

The US Department of Labor announced on the 14th (local time) that the August CPI rose 0.3% compared to the previous month. This increase was slower than the market expectation of 0.4% and the previous month's 0.5% rise. CPI had increased by 0.9% in June and 0.5% in July, respectively.

The August CPI rose 5.3% year-on-year, slightly down from 5.4% in the previous month.

The core CPI, which excludes fuel and food, showed an even smaller increase. Core CPI rose 0.1% month-on-month, significantly below the market expectation of 0.3%. On an annual basis, it increased by only 4.0%, showing a notable slowdown compared to the expected 4.2% and the previous 4.3%.

Used car prices, which had driven inflation increases, fell by 1.5%, but new car prices rose by 1.2%. Hotel and airline fares also declined compared to July. Transportation services dropped by 2.3%.

The Wall Street Journal (WSJ) reported that the slowdown in used car prices and travel demand limited the rise in prices, attributing this to reduced demand caused by the Delta variant of COVID-19.

Excluding gasoline and food prices, most price items recorded the lowest increase since February.

CNBC reported that although the August CPI remains at the highest level in 13 years on an annual basis, it could be a sign that inflation increases may be calming down.

There are also opinions that inflation will persist for a considerable period. Aichi Amemiya, Chief Economist at Nomura Securities, said, "The worst inflation situation has passed, but significant pressure remains."

Supply chain issues, such as a shortage of automobile production due to semiconductor shortages, remain a long-term negative factor. The fact that used car prices fell in August while new car prices rose adds weight to this analysis.

WSJ also reported that many economists are concerned that greater inflationary pressures will occur in the fourth quarter. It is expected that CPI will rise as housing rent increases are fully reflected. Housing rent accounts for about 30% of the CPI increase, making it an important point.

This CPI is widely expected to have a significant impact on the decision regarding tapering at the FOMC meeting scheduled for next week.

The Federal Reserve (Fed) has emphasized that inflation is temporary but has indicated that inflation targets among monetary policy goals have already been met and that tapering will be decided considering employment targets.

The Beige Book released by the Fed last week mentioned that the economy slightly declined in August, and August employment fell far short of expectations. Additionally, signs of inflation slowing down reduce the likelihood of a tapering decision at the September FOMC. Earlier, WSJ predicted, based on Fed officials' remarks, that an agreement would be attempted in September to implement tapering in November.

With the Fed effectively signaling tapering within this year, if a tapering decision is not made at the September FOMC, it is highly likely to be decided at the November FOMC.

Art Hogan, Chief Investment Strategist at National Securities, said, "The Fed will discuss tapering at the September meeting but is expected to announce implementation within this year at the November meeting."