U.S.: Commodities Push CPI Lower in August

• U.S. headline CPI declined for the first time in almost two years.
• Core CPI rose by a moderate 0.2% M/M.
• The decline in the headline rate of inflation was due mostly to the drop in energy prices.

U.S. consumer prices declined for the first time since October 2006, falling by 0.14% M/M in August, following the 0.8% M/M increase in July. With the monthly decline in the headline index in August, the annual rate of consumer inflation declined to 5.4% Y/Y, following the 5.6% Y/Y print in July. Market consensus was for a reading of 5.5% Y/Y. Core consumer prices rose by a fairly modest 0.194% M/M, leaving the annual rate of core inflation unchanged at 2.5% Y/Y. The 3-month annualised rate of core inflation moderated to 3.4% (from 3.5% in July), while the 6-month annualised rate accelerated to 2.6% from 2.3% in July.

The details of the report were fairly mixed. As expected, energy prices declined for the first time since February, falling by 3.1% M/M (down from +4.0% M/M in July), though prices are still 27.2% higher than they were in August last year. Overall, commodity prices declined by 0.5% M/M, following the 1.2% M/M surge in July. There were also declines in vehicle prices (down 0.4% M/M) and housing (-0.1% M/M). On the other hand, the cost of food (up 0.6% M/M, though down from +0.9% M/M in July), apparel (+0.5% M/M) and recreation (+0.5% M/M) edged higher on the month. The price of services increased by a modest 0.1% M/M, following the +0.5% M/M in July.

With the FOMC meeting today, the decline in the headline index and evidence that core consumer prices may also be moderating will come as some relief. Additionally, with commodity prices continuing to head lower (particularly energy prices), we expect to see further moderation in consumer inflation in the coming months, which will provide some breathing room for the Fed to cut rates in the coming months (if this is deemed necessary, though much will depend on financial and economic conditions).

TD Bank Financial Group

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