Synopsis:

CIBC notes that the August inflation report surprised on the upside, primarily due to accelerating service prices. Core CPI exceeded expectations, while headline inflation remained stable. The report reflects ongoing challenges in shelter inflation but overall progress towards the inflation target.

Key Points:

• Inflation Metrics:

  • Core CPI: Rose by 0.3% m/m, slightly above expectations. The three-month annualized core CPI stands at 2.1%.
  • Headline CPI: Increased by 0.2% m/m in July, aligning with forecasts. Year-over-year, headline inflation decreased to 2.5% due to favorable base-year effects.
  • Core Inflation: Remained steady at 3.2%. Core goods prices fell, driven by a rebalance in the used car market.

• Service Prices:

  • Strengthening: Notable increases in shelter and transportation service categories.
  • Shelter Inflation: Continued to rise, with Owner’s Equivalent Rent (OER) increasing for the second consecutive month.

• Fed's Focus:

  • Inflation Momentum: While the report was not ideal for the Fed, inflation trends are improving, with confidence in reaching the target despite some persistent issues in shelter inflation.
  • Labor Market: The Fed is now prioritizing the labor market over inflation data, assessing whether the job market is "normalizing" or "deteriorating."

Conclusion:

The August CPI report indicates stronger-than-expected inflation driven by service prices, particularly in shelter. Despite this, the overall progress towards the inflation target remains positive. The Fed is shifting focus towards labor market dynamics, which are now a more critical factor than inflation reports.