Highlights
The economic debate over the timing of the Fed's next interest rate move started today with the August consumer price index report. Overall consumer price inflation in August fell slightly on lower energy prices while core inflation held steady. The overall consumer price index in August fell 0.1 percent, following a 0.1 percent up tick in July. The August figure was just below the market forecast for no change in the overall CPI. For August, the core CPI inflation rate posted a 0.2 percent increase, after rising 0.2 percent in each of the prior two months. Today's report gives the Fed breathing room in terms of not having egg on its face with what could have been a bad inflation report. Clearly, the headline number is good but the debate over future interest rate cuts will focus on what happens when energy is not declining and perhaps rising again, given that the core has been stuck a 0.2 percent for three months. And the inflation hawks are now showing up in the bond market, with traders pushing up long-term interest rates. Equities are loving the numbers, however.

Year-on-year, the overall CPI declined to 1.9 percent in August from 2.4 percent in July. The core rate stood at 2.1 percent in August, down from 2.2 percent for the prior month on a year-on-year basis.

Lower energy prices helped the overall CPI in August as they did in July and June but more so in August. In the non-expenditure category for energy, prices dropped 3.2 percent, following a 1.0 percent drop in July. Energy weakness was led by motor fuel which fell 4.9 percent, following a 1.7 percent decline in July. Fuel oil prices rose slightly while piped gas & electricity dipped. Food price inflation pick back up in August with a 0.4 percent boost, following a 0.3 percent gain in July.

Giving the Fed's decision yesterday more credibility and more hope for future improvement in inflation is the fact that the headline weakness is not limited to just energy. Expenditure categories showing weakness were transportation, down 1.2 percent (inclusive of motor fuel); apparel, down 0.5 percent; and recreation, down 0.1 percent. Upward price pressure was primarily in medical care, up 0.5 percent; food & beverages, up 0.4 percent; and in education & communication, up 0.3 percent. The important (large) housing component was flat after a 0.2 percent rise in July. Housing's softness was led by a drop in lodging while away from home, down 0.6 percent, and household energy, down 1.2 percent. Rent and owners' equivalent rent were moderate at 0.2 percent each in August.

On an unrounded basis, the core CPI in August actually showed improvement. The core CPI eased to a slim gain of 0.15028 percent in August, following increases of 0.23618 percent in July and 0.23244 percent in June. The unrounded core figure is far more encouraging than the rounded figure.

Today's report gives hope that inflation may be easing although the more recent spike in oil prices raises some questions for coming months. In the mean time, equities are getting a lift, short rates are down, but long rates have been nudged up on longer-run inflation concerns from the Fed's interest rate cut.

2007 Release Schedule

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