US: Look through the headline gain in CPI

Derek Holt, Research Analyst at Scotiabank, suggests that the mildly useful information in latest US CPI print is not the acceleration in headline inflation but the slight deceleration in core inflation and even that’s a stretch.

Key Quotes

“Both US 2 year yields and the USD versus the Euro are little changed post-release and that’s probably the correction interpretation.

The rise in headline CPI inflation to 1.5% y/y from 1.1% the prior month is reflecting the fact that we are rebasing to year-ago comparisons for gasoline prices over a period in which gasoline prices were starting to drop. Gas prices fell from mid-2015 through to February of this year and so the year-ago comps are being pushed relatively higher. This is not — or should not be — new information to markets or anyone who can look up the ticker for gasoline prices.

Core inflation slipped a tick to 2.2% y/y but even that carries limited information in that core inflation has been bouncing within a 2.1-2.3% y/y range throughout this year. Nothing much to see here folks, and no real added information that would sway the Fed. If anything, what should be questioned here is the durability of the pick-up in inflation. I suspect as we push into next year we’ll see moderating inflation again, and both in terms of headline as the year-ago base effect from gas prices runs its course by midwinter, and the sustainability of core inflation faces continued head winds like moderate wage growth, spare capacity in the US economy, and US$ strength. The Fed may be getting closer to its goals, but how durable they are remains a very active and legitimate debate.”

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