US: Slower inflation, but still disappointing – Wells Fargo

Data released on Tuesday showed inflation in the US rose above expectations in August, boosting the US dollar across the board. According to analysts at Wells Fargo, a 50 basius points rate hike at next week's FOMC meeting now seems like a distant pipe dream, with a 75 bps rate hike now all but assured.

Key Quotes: 

“The Consumer Price Index increased 0.1% in August, but the modest gain for the headline index masked what was a disappointing report. Gasoline prices fell 10.6% in the month, helping to keep overall inflation in check, but beyond energy goods there were not many encouraging takeaways. Excluding food and energy prices, core inflation increased 0.6%, well above the Bloomberg consensus of 0.3%. Core goods inflation remained strong and broad-based despite indications that supply chains are functioning more smoothly and inventory stockpiles are building. Core services inflation also remained hot, increasing 0.6% in August.”

“There remains considerable ground to cover before getting inflation back to a pace that resembles the Fed's target. Over the past three months, the core CPI has advanced at a 6.5% annualized pace, more than triple the 2% target. Moreover, a sustained return to 2% inflation remains even more distant at present. The tight labor market has kept compensation, the largest cost for most businesses, advancing well above 2% (even after accounting for productivity growth), while consumer and business inflation expectations remain high relative to the range of recent decades.”

“We think the road to returning inflation to target is still a long one, and we continue to look for the FOMC to press ahead with another 75 bps point hike at its meeting next week.”