» CPI: Deceleration Begins, Core Sluggish on Apparel Decision Economics

CPI: Deceleration Begins, Core Sluggish on Apparel

Posted September 13, 2018 by rvillareal

Headline and core consumer prices undershoot expectations in August, rising 0.2% overall (Consensus and DE: 0.3%) and 0.1% on the core (Consensus and DE: 0.2%).

The topping and deceleration we expect into year-end has started, with the headline rate slipping to 2.7% y/y, from 2.9%, and the core to 2.2% y/y in August, from 2.4%. The core posts 1.9% on a 3m-annualized basis.

Good news for a recovery in real income growth ahead, bad news for hopes of a catalyst for bond bears.


  • Energy prices rose 1.9% m/m on an anticipated rise in fuel costs, while food prices rose 0.1%.
  • Within the core, core commodities prices fell 0.3%, down 0.2% y/y, while ex-energy services prices posted a 0.2% gain, steady at 3% y/y.
  • Rents remained firm in a trend sense while medical care services prices were soft, down 0.2% m/m, in a broad decline.
  • Some hints of another downdraft in wireless cell plan prices, off 0.4% m/m, a trend that may persist as carriers compete for customers in a more mature market, and enabled by some technology changes introduced by a major phone manufacturer on Wednesday.
  • Within core commodities, vehicle prices were flat while apparel was down 1.6% m/m in a historically-steep decline.

Bottom Line

Strong year-ago base effects will continue to fall out of y/y comparisons into year-end, subject to surprises in energy prices which have recently ticked higher. Convergence toward 2% is not impossible in Q1 on the CPI, though we remain focused on conditions that should support inflation at 2% and higher, not lower.

Still, there’s little here to shift investors’ or Fed thinking. Inflation is effectively at target but not showing acceleration that might prompt a more rapid lift in interest rates. The labor market is tight on traditional metrics, but with enough wiggle room in others to suggest some slack remains, keeping the Fed on a gradual path.

To the extent firms are better able to eat the costs in the wake of tax cuts (and internalize tariffs too) they may do that, as it’s so far been difficult to raise prices much on average, in a competitive environment.