U.S. Consumer Inflation Warms Up, Bank of England Concerned About Inflation
- The August Consumer Price Index increased by 0.4 percent.
- Initial Claims for Unemployment Insurance decreased by 14,000 for the week ending September 9.
- The Bank of England signals interest rate hike soon.
The headline Consumer Price Index for August came in warmer than expected, increasing by 0.4 percent for the month. It was the strongest monthly gain since January. Energy prices provided a push as gasoline was up 6.3 percent for the month. The higher energy prices in August do not include the full effect of the refinery shutdowns due to Hurricane Harvey. So, we expect to see another push from energy prices in September. Core CPI (all items less food and energy) increased by 0.2 percent for the month. Rents were also a factor in August, pushing up the shelter component of the CPI, which increased by 0.5 percent in August. Over the 12 months ending in August, headline CPI was up by 1.9 while core CPI was up by 1.7 percent. Looking ahead, we expect to see more price pressure from energy in September. We may also see other hurricane effects in the inflation data due to shortages of building materials and other items. Also, this year’s ongoing easing trend in the value of the dollar is supportive of import price inflation. Today’s warmer than expected consumer price data for August contrasts with the producer price data for the month which was a little cooler than expected. Recent inflation reports will provide fuel for discussion at the upcoming Federal Open Market Committee meeting September 19-20. The FOMC is divided between those who think inflation is weak and therefore would favor lower interest rates for longer, and those who think that the Fed should continue with rate hikes. We will get four sets of data next Wednesday from the Fed that we will use to shape our interest rate expectations for the rest of this year. We will see a new policy announcement, a new set of economic forecasts, a new dot plot and a press conference from Janet Yellen on Wednesday.
Speaking of inflation and interest rates, the Bank of England is now expected to raise its benchmark interest rate within months. A falling pound has helped to stoke inflation in the United Kingdom to well above target levels. With the Bank of England likely raising interest rates there before the end of this year, the U.S. Federal Reserve likely beginning balance sheet reduction before the end of this year, and the European Central Bank likely announcing that it will begin tapering asset purchases by the end of this year, a coordinated global monetary tightening appears to be underway.
Initial claims for unemployment insurance fell by 14,000 for the week ending September 9, to hit 284,000. This comes on the heels of a surge in initial UI claims last week, gaining 62,000 after Hurricane Harvey swamped South Texas. We expect to see another surge in weekly UI claims related to Hurricane Irma over the next couple of weeks. The good news is that the U.S. labor market remains strong, and most of the workers laid off because of the storms will be called back to work relatively quickly.
Market Reaction: Equity markets opened with losses. The 10-Year Treasury bond yield is up to 2.19 percent. NYMEX crude oil is up to $50.24/barrel. Natural gas futures are up to $3.09/MMBtu.
For a PDF version of this Comerica Economic Alert click here: CPI_09142017.
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