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Inflation ticked up to 2.9% in August, from 2.7% in July. A surge in beef prices, caused by drought in recent years that has led ranchers to thin cattle herds, boosted overall food prices by a larger-than-normal 0.5%, and energy was up 0.7%. Excluding food and energy, inflation remained constant at 3.1%. Services price increases excluding energy remained elevated in August, due to a second large jump in airfares that were propelled by July’s rise in jet fuel prices. Car repair costs surged 5.0% and have now risen 15.0% over the past year. This increase is generally tied to the cost of parts, which are mostly imported and subject to new tariffs. Finally, shelter costs bumped up a bit more than normal, but they are expected to settle down again in next month’s report.
Tariffs pushed up prices of some goods in August’s inflation report, but so far have had only a modest effect on overall inflation. Prices of some consumer goods that are typically imported are rising strongly, such as cookware/tableware (up 5.6% over the past year), audio equipment (up 12.2%), tools (up 5.8%) and basic furniture (up 9.5%). Televisions, which are mostly imported, showed their first strong increase, jumping 2.5%. New motor vehicles edged up slightly, but used vehicles rose 1.0%, their second large jump in a row. It seems likely that tariff costs will become more noticeable in prices as pretariff inventories of imported goods are drawn down throughout the summer. However, some businesses may opt to cut their profit margins rather than lose market share.
Expect inflation to end the year a bit higher, at 3.4%. Core inflation (excluding food and energy) should also come in at 3.4%.
Inflation is still high in the eyes of the Federal Reserve, but the dismal August jobs report is likely to take precedence and force the Fed to cut interest rates at its next policy meeting on Sept. 17. The Fed would like to see whether the bump in services prices in August comes down in September, and also study the effects of tariffs on inflation over the next several months. If labor market weakness continues, the Fed is likely to cut rates twice more before the end of the year.
While the headlines focus on the Consumer Price Index, note that the Fed’s goal of 2% inflation is based on a different measure, called the personal consumption expenditures deflator. The PCE deflator excluding food and energy is forecast to have risen at a 2.9% rate for the 12 months ending in August, compared with the core CPI’s 3.1% number. That’s still well above the Fed’s target for 2% inflation over the long term.
