Inflation Hotter Than Expected, Manufacturing Output Up, Labor Weak
- The Consumer Price Index for August increased by 0.4 percent with pressure from energy and apparel.
- The core CPI is now up 2.0 percent over the past 12 months. Rents are increasing as vacancy rates fall.
- Industrial Production for August increased by 0.2 percent. Manufacturing was up by 0.5 percent.
- Initial Claims for Unemployment Insurance were up by 11,000 to 417K for the week ending Sept. 10.
Consumer prices in August were hotter than expected as the headline CPI registered a 0.4 percent increase on the heels of a 0.5 percent gain in July. The pressure on the headline number was broad-based, coming from energy, food, apparel and rents. Gasoline prices were down before seasonal adjustment. They were just not down enough. After seasonal adjustment gasoline prices were up 1.9 percent in August, driving the energy index up by 1.2 percent. Food prices gained 0.5 percent with five of the six major grocery store food groups rising. Apparel prices tallied their fourth consecutive monthly gain over 1.0 percent, climbing by 1.1 percent in August, and reflecting increases in raw cotton prices earlier in the year. Falling vacancy rates are pushing up rents, elevating the overall shelter index up by 0.2 percent. This may not look significant but shelter has been an anchor on the core index (all items less food and energy). Now that anchor is starting to slip. Over the past 12 months the headline CPI is up 3.8 percent and the core CPI is up 2.0 percent. Higher inflation will limit monetary policy maneuvering room at the Federal Reserve. One choice for easy policy advocates is to define away the problem by elevating the Fed’s so-called “comfort zone” for inflation.
The Industrial Production Index for August increased by a modest 0.2 percent, but the headline number was held down by falling utility output. The utility index for August cooled by 3.0 percent after it turned up 2.8 percent in the July heat wave. Overall manufacturing output increased by 0.5 percent after growing by 0.6 percent in July with the rebound in automobile production. It is reassuring to see that the July gain to manufacturing output has legs. If the two-month rebound is sustained, manufacturing may again ride to the rescue as it did in 2010. Initial claims for unemployment insurance notched up again, increasing by 11,000 for the week ending September 10. A Department of Labor spokesman said there was no impact from Hurricane Irene, but that appears dubious. Claims have been gradually increasing since mid-August when confidence measures tanked. We will get a cleaner read on the claims numbers over the next few weeks. The Philadelphia Federal Reserve’s Business Outlook Survey showed a dead cat bounce for September, bouncing back to -17.5 after plunging to -30.7 in August. There is little pull from increased auto production to the Philadelphia region.
Market Reaction: Equities opened on the upside. Treasury yields are rising. Oil is up to $89.82/barrel. The dollar is up against the yen and down versus the euro.