The US Fed may finally be getting what it wanted from the latest inflation figures. CPI figures released by the US Labor Department for August indicate consumer prices rose 0.2% for the month, 1.1% for the year and more than the 0.1% expected by financial markets. Core prices, the measure of prices which strips out food and energy prices changes, rose a higher-than-expected 0.3% for the month. Over the last 12 months the rise was 2.3% (seasonally adjusted) and back to pre-GFC levels (see chart below).
It is a little early to state definitely that inflation is rising; the headline CPI figure is still closer to 1% than 2% and other economic indicators such as retail sales and industrial production figures have been weak. However, both headline and core inflation figures beat expectations and US bond yields rose once the report was released. The USD was higher against a basket of currencies, which indicates exchange markets think higher interest rates in the US are more likely. On the other hand, cash market futures imply the probability of a rate increase at September’s meeting of the US Fed is still only 18%.
According to the Bureau of Labor Statistics rises in the overall price level was driven by housing and medical care costs. Medical care services rose 5.1% in the last twelve months while medicines and other medical care consumables rose 4.5% for the same period. Falling oil prices have been responsible for low consumer inflation figures in the last few years but in august energy costs were stable, although they were down 9.2% compared to August last year.
On the day US yields had drifted lower until the report’s release sparked a reversal. The US 2 year yield rose 3bps to 0.76% and 10 year yield finished 1bp higher at 1.69%.
