US: Core inflation remains a source of concern – UOB

The latest US Aug inflation report is overall seen as in line with market expectations but the slight uptick in m/m core inflation sparked concerns about future Fed hikes even though y/y core inflation continued to ease to 4.3% y/y, lowest level in 2 years. 

The US Aug headline CPI rose by 0.6% m/m (exactly at the Bloomberg median estimate, up from 0.2% m/m in Jul) and it was also the fastest m/m pace recorded so far in 2023, largely due to higher energy prices. This translated to a faster headline CPI inflation at 3.7% y/y (versus Bloomberg est 3.6% y/y, UOB est 3.5% y/y, and up from 3.2% y/y in Jul).

Core CPI (which excludes food and energy) saw a sequential pickup in pace to 0.3% m/m (above Bloomberg est 0.2% m/m, and up from the 0.2% pace in Jun and Jul). Compared to one year ago, core inflation eased to 4.3% y/y in Aug, from 4.7% y/y in Jul. The 4.3% print was exactly at the Bloomberg median estimate and was also the lowest y/y core inflation print since Sep 2021 (4.0%).

US Inflation Outlook – Taking stock of the price trajectory to date, despite the slight Jul & Aug y/y upticks, we continue to expect headline inflation to head lower towards end 2023 (in part due to base effects) and to average about 3.2% for 2023. In comparison, core inflation continued to ease, and we still expect core inflation to ease to 3.0% y/y by end-2023, but still above the Fed’s 2% objective. For the full year, we expect core inflation to average 4.6% in 2023.