US: Core inflation remains a source of concern – UOB

Senior Economist at UOB Group Alvin Liew assesses the latest release of US inflation figures.

Key Takeaways

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.