WASHINGTON: US underlying consumer prices increased solidly in August, leading to the largest annual gain in a year, but rising inflation is unlikely to deter the Federal Reserve from cutting interest rates again next week to support a slowing economy.
Other data on Thursday (Sep 12) showed the number of Americans filing applications for unemployment benefits dropped to a five-month low last week suggesting the labour market remains healthy, which should continue to underpin consumer spending even as hiring has cooled. The longest economic expansion on record is under threat from the White House's year-long trade war with China.
Fed Chair Jerome Powell said last week he was not forecasting or expecting a recession, but reiterated the US central bank would continue to act "as appropriate" to keep the expansion now in its 11th year on track. But the firming inflation trend, if sustained, could constrain the Fed's ability to ease monetary policy further.
"Concerns about too-low inflation appear misguided," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "The Fed will still cut rates next week to provide added insurance in the event that the trade war escalates, but it might think twice about moving again in October if core inflation shows any further spark."
The Labour Department said its consumer price index excluding the volatile food and energy components gained 0.3 per cent for a third straight month. The so-called core CPI was boosted by a surge in healthcare costs and increases in prices for airline tickets, recreation and used cars and trucks.
In the 12 months through August, the core CPI increased 2.4 per cent, the most since July 2018, after climbing 2.2 per cent in July.
Economists polled by Reuters had forecast the core CPI rising 0.2 per cent in August and up 2.3 per cent on a year-on-year basis.
But a decline in energy prices held back the increase in the overall CPI to 0.1 per cent last month. The CPI gained 0.3 per cent in July. In the 12 months through August, the CPI increased 1.7 per cent, slowing from July's 1.8 per cent advance.
The Fed, which has a two per cent inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index rose 1.6 per cent on a year-on-year basis in July and has fallen short of the central bank's target this year.
Economists expect inflation will accelerate in the coming months and breach the Fed's target in 2020 following the broadening this month of US tariffs on Chinese goods to include a range of consumer goods. Still, the Fed is likely to continue cutting interest rates this year to offset the drag on the economy from the trade war.
Financial markets have fully priced in a rate cut at the Fed's Sep 17-18 policy meeting. Most economists expect additional monetary policy easing in October and December.
The Fed cut rates in July for the first time since 2008.
The trade stand-off has soured business confidence and tipped both US and global manufacturing into recession.
Treasury Secretary Steven Mnuchin said on Thursday President Donald Trump was prepared to keep or even raise tariffs on Chinese imports amid ongoing trade talks. Mnuchin's comments came despite Washington and Beijing granting concessions ahead of the next round of negotiations.
The dollar fell against a basket of currencies after the European Central Bank launched new stimulus but failed to live up to some dovish financial market expectations. US Treasury prices fell, while stocks on Wall Street were trading higher.
Despite the economy's waning fortunes, underscored by an inversion of the US Treasury yield curve, employers are holding onto their workers.
In another report on Thursday, the Labour Department said initial claims for state unemployment benefits declined 15,000 to a seasonally-adjusted 204,000 for the week ended Sep 7, the lowest level since April.
The drop in claims was the largest since May. Robust consumer spending, which is backed by the strong labour market, is driving the economy.
"The labour market strongly suggests the economy continues to expand," said John Ryding, chief economist at RDQ Economics in New York.
In August, gasoline prices fell 3.5 per cent after rebounding 2.5 per cent in July. Food prices were unchanged for the third straight month. Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, rose 0.2 per cent in August for a second consecutive month.
Healthcare costs jumped 0.7 per cent in August, the largest gain since August 2016, after rising 0.5 per cent in July. They were driven by a 1.4 per cent surge in the price of hospital services, which was also the biggest increase since August 2016.
The cost of health insurance rose by a record 1.9 per cent. There was also a jump in the costs of nonprescription drugs, but prices for prescription medication fell 0.2 per cent.
Apparel prices rose 0.2 per cent after gaining 0.4 per cent in the prior month. Used motor vehicles and trucks prices increased 1.1 per cent in August, rising for a third straight month. Prices for new motor vehicles dipped 0.1 per cent. Prices for recreation increased 0.5 per cent, the most since December 2018.
The cost of household furnishings and operations fell after rising for two consecutive months.