The U.S. Labor Department announced on Wednesday that the Consumer Price Index had dropped by 0.1% in August, its first drop since January after it edged up in July by 0.1%. This merely implies that prices of everything, including gas, are just slightly above the same level as past year, and far away from the Fed’s 2.0% inflation rate.
So-called core prices, which exclude volatile food and energy costs, rose 0.1% in August, the same as the previous month.
Egg prices, which have been pushed higher by an avian flu outbreak among chickens, rose 7.7 percent in August and are now up 35.3 percent over a year ago. The cost of a regular gallon of gas fell about 8% last month, according to the Energy Information Administration. With the seasonally-adjusted price of WTI oil falling by over 16% M/M in both July and August, more declines ahead are likely once the lagged impact is fully incorporated.
The price of fuel had risen three straight months before the decline in August.
A decision is due on Thursday.
The Fed’s dual mandate is to maximize employment and keep prices stable. There were increases in prices for tobacco and apparel.
In the 12 months to August, the CPI rose 0.2% after a similar gain in July.
Fed officials have said they expected the effects of lower oil prices to be temporary. However, with foreign economies still weak and energy prices still dramatically low, the outlook for higher inflation is still very weak for the moment.
Inflation will be a key topic as central bank policymakers gather Wednesday for two days to decide whether to raise their benchmark federal funds rate for the first time since 2006.
Markit chief economist Chris Williamson says the bank “will remain ultra-cautious about tightening policy, but the upturn in pay growth certainly suggests that a first rate hike by the end of the year remains a distinct possibility”. Airfares were down by 3.1%, not including fees at least.
Going into the Fed minutes on September 17, the 1.8% year-over-year increase in core inflation does really stand out and will be a major talking point for Fed officials.
The Fed tracks the personal consumption expenditures price index, excluding food and energy, which is running well below the core CPI. Medical commodities increased 0.3 per cent over the month and 3.4 per cent over the year.