CPI Finally Accelerates – A Small Sigh of Relief for the Fed

As many observers expected, after five months of surprisingly soft inflation prints, prices firmed in August. U.S. core CPI inflation (which excludes the volatile food and energy categories) was up 0.25%, boosted by the largest-ever one-month increase in hotel prices and surprising firmness in rents and owners’ equivalent rents (OER).

Overall, the August print bolsters our outlook for a return to 2% CPI inflation in 2018. Still, despite the recent firming, we continue to expect core personal consumption expenditures (PCE) inflation (the Federal Reserve’s preferred gauge) to end 2017 below the most recent median Federal Open Market Committee (FOMC) projection of 1.7%.

Hotel prices and rents provide a boost

Turning to the details of the report, a record-high one-month increase in hotel prices (+4.38%) – following the largest-ever drop (-4.2%) last month – was a big contributor to the CPI gains. The midweek timing of the Fourth of July holiday this year, along with the rise in peer-to-peer lodging, likely exacerbated recent volatility.

At the same time, rents (+0.39%) and OER (+0.35%) firmed further following disinflationary trends in the first half of the year, turning in the largest one-month advances since the 2008 financial crisis.

Because the rent categories tend to have the tightest correlations with measures of economic slack, today’s report was likely a relief to Fed officials after several months of soft prints raised questions about the traditional link between economic slack and inflation.