US inflation misses on the downside, but price pressures will build - ING

James Knightley, Chief International Economist at ING notes that the US headline inflation rose, but at 1.7% remains below the 2% target. Nonetheless, the weaker dollar, commodity prices and a healthy economy suggest inflation will gradually edge higher, he further adds.

Key Quotes

“US consumer price inflation for July has come in at 0.1%MoM/1.7%YoY for both headline and core (ex food and energy). This was below the 0.2%MoM/1.8%YoY predicted by the market, but we (and probably a lot of other people) had suspected the lower figure would be the likely outcome following yesterday’s softer than anticipated PPI report.”

“The details again showing energy prices pushed the headline rate down (with transportation services also seeing price falls) while housing continues its very benign run, rising just 0.1%MoM. This is also due to lower fuel and utility prices. Meanwhile, the cell phone contracts price war continues and has subtracted 0.2 percentage points from the headline annual rate of inflation.”

“The Federal Reserve doves will seize on this subdued headline reading as further evidence backing the case for a period of stable interest rates. Nonetheless, this brings to an end four consecutive months of deceleration and we think that further rises are likely in the months ahead. The 10% fall in the dollar since the start of the year will help nudge up import costs while rising commodity prices will soon see a reversal in the energy component. With the economy adding jobs and some (very nascent) evidence of a pick-up in wage growth we still think inflation will be back above the 2% target before the end of the year. As such a December rate hike still remains on the cards in our view.”