US CPI Posts 0.2% Increase in August

There was a rise of 0.2% in the US consumer price index report released today for the month of August, the rise was more than analyst’s previous forecast which called for a 0.1% gain in the index, the CPI now posts an annual increase of 1.1%, 0.3% higher than it was before today’s release. Economists polled by Reuters had forecast a 0.1 percent rise for August.

The rise was mostly fuelled by more expensive housing, most especially in rent, and medical care. Medical care costs grew by 1%, the fastest rate since 1984, the Labor Department stated on Friday. The cost of prescription drugs also soared 1.3%, bringing the increase in prices over the past year to 6.3%. That’s the largest year-over-year increase in two years.

Higher drug prices have drawn criticism from lawmakers in Washington, especially Democrats, in the wake of a controversy involving Mylan, the maker of the EpiPen. The company jacked up the price so much that a public uproar ensued, forcing the company to scale back the increases.

There was also a rise in Auto insurance which posted a rise of 0.5% for the month of August and a rise of 6.5% in the past year. Excluding the volatile food and energy categories, so-called core consumer prices climbed 0.3%.

The gains were however more concentrated in relatively small areas, and is likely to raise the pressure on the more hawkish Federal Reserve members for higher US interest rates. Excluding energy and food prices, underlying prices posted their strongest reading since February as they grew by 0.3% on the month. The growth was 0.1% higher than the forecasted growth, underlying prices now hold an annual increase of 2.3% from a previous 2.2%. Food prices were the same on the month and also unchanged over the year. This is the first time since February 2010 that food prices have remained unchanged over the current year.

Overall energy prices also remained the same as a slump in gasoline prices and fuel for the month were offset by a further swift rise in natural gas utility prices. There was a 1.1% rise in natural gas prices over the year, as overall energy prices fell by 9.2%.

Treasury Inflation Protected Securities, whose principal and interest payments are adjusted against the CPI, gained on the stronger-than-expected reading. The yield difference between regular 10-year Treasury notes and 10-year TIPS was last at 1.52 percent, nearly 2 basis points wider than late on Thursday, according to Tradeweb.

The yield gap between regular five-year Treasuries and five-year TIPS also widened nearly 2 basis points, to 1.36 percent, close to the upper end of its trading range since late July.

The release which is higher than economists had earlier forecasted will further strengthen the hawkish Federal Reserve members at next week’s FOMC meeting, especially as the hawks forward-looking and very uneasy over delaying rates increases for too long. Price increases were relatively narrow and concentrated in medical care with the more dovish members likely to point to more subdued overall pressures. The data is liable to amplify already considerable divisions at the meeting. The chances of a rate hike by year-end were back to just above 50% according to Fed Funds futures data.

The dollar strengthened after the data with EUR/USD testing the 1.1200 level as USD/JPY pared earlier losses. Treasury prices moved lower, although the overall response was muted with 10-year futures still in positive territory for the day, while equity futures were slightly lower.