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Tuesday, October 17 2017 @ 12:55 PM AST

Steady U.S. inflation offers no new disinflation concerns

by Lindsey M. Piegza, Ph.D., Chief Economist, STIFEL

This morning, the CPI rose 0.1% in July, a three month high, albeit a tenth less than expected according to Bloomberg, and following no change to prices in June. Year-over-year, headline consumers prices rose 1.7% at the start of Q3, gaining minimally from a 1.6% annual pace reported in June.

Energy costs fell 0.1% in July, the third consecutive month of decline. Food prices, on the other hand, rose 0.2% in July, the strongest gain since May. Excluding food and energy, the core CPI rose 0.1% in July and 1.7% over the past 12 months. The core CPI has held steady at 1.7% for the past three months.

In the details, service costs rose 0.2% in July. Housing prices rose 0.1% in July, thanks to a 0.3% increase in the OER and despite a 0.2% decline in fuels and utilities prices.

Apparel prices rose 0.3% in July after four consecutive months of decline, medical care costs rose 0.4% and recreation prices gained 0.3%. Other goods and services costs gained 0.1%, although tobacco costs declined 0.1%, the second month of negative price appreciation, and commodities prices were flat at the start of Q3.

Transportation prices slipped 0.1% in July, and education and communication costs fell 0.1%, despite a 1.1% rise in the price of personal computers.

Bottom Line: This morning's July inflation release reported a weaker-than-expected monthly gain in the CPI. The annual pace of headline consumer prices, however, rose one-tenth, a meaningful move from a directional standpoint after four months of downward momentum. Coupled with a steady pace in core prices, while inflation remains still-noticeably below the Fedís longer term objective, there is little additional concern of further disinflation from this morning's report. In other words, the July inflation report offers little new evidence to suggest inflation has permanently deviated from the Committee's anticipated pathway back towards 2%. Furthermore, the still-moderate pace is likely to keep Fed members convinced the decline in prices is "transitory" and additionally reinforce the need for further policy adjustment by the end of the year.

Later today, on the heels of this morningís CPI release, Minneapolis Federal Reserve President Neel Kashkari is scheduled to speak at a Q&A session with the Independent Community Bankers of Minnesota in Bloomington, Minnesota. Kashkari has warned against moving rates ahead of meeting the Fedís inflation target. Kashkari dissented two times in 2017 in favor of holding rates steady until inflation picked up. Kashkari is a voting member of the FOMC this year.

Also today, Dallas Federal Reserve President Robert Kaplan is scheduled to speak at an event for the University of Texas at Arlington Accounting Departmentís Sixth Annual CPE Day. Kaplan has suggested the need for additional evidence that data is moving towards the Committee's 2% goal before he will back additional policy removal. Kaplan is also a voting member of the FOMC this year.

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