Retail Dip Weighs on U.S. Core CPI Inflation

U.S. core Consumer Price Index (CPI) inflation lagged expectations in August, breaking from the recent trend of generally upward surprises from various wage and price reports.

Core CPI advanced 0.08% month over month, well under consensus expectations for a 0.2% rise, and the year-over-year rate ticked down to 2.2% (from 2.4% in July). The slower CPI reading follows positive revisions to unit labor cost inflation and an acceleration in average hourly earnings ­– and raises questions about the extent to which faster nominal wage inflation, which has been accompanied by faster productivity growth over the past year, will result in higher consumer price inflation.

Yesterday's report also confirms various Federal Open Market Committee (FOMC) participants’ assertions that broader inflationary forces are manageable despite the historically low unemployment rate, and reinforces our view that a gradual pace of rate hikes remains appropriate for now.

Broad retail declines weigh down core CPI

Core CPI inflation (which excludes food and energy prices) was weighed down by the largest monthly drop in core retail goods (-0.5%) for this economic cycle, outside of the year-end holiday sales period (which has witnessed steeper discounting in recent years). Declines were broad-based but particularly notable in apparel, TVs and other electronics, sporting goods and toys.

Over the past several years, prices in these segments have generally declined amid higher competition from e-commerce retailers, including Amazon. Prices appeared to firm somewhat over the first half of the year, likely the result of rising input prices and the lagged effects of 2017 U.S. dollar depreciation across currencies in Asian countries, including China, that supply goods to the U.S. However, more recently the dollar has strengthened. While the lag for currency movements to spill over into consumer prices is generally thought to be around six to 12 months, it’s possible that currency-related price cuts are happening more quickly. While the August weakness could also be a one-off occurrence, we are keeping an eye on this trend.