Hello, my name is Stephanie Aliaga and I am a research analyst at J.P. Morgan Asset Management with an update following the August CPI report.

Headline inflation accelerated last month primarily due to a jump in energy prices, but core inflation came in a bit hotter too. The bounce in the headline was widely expected, as recent OPEC supply cuts have raised the price of oil by more than $20 in the last 3 months. Since energy accounts for 7% of the CPI basket, the jump in gas prices contributed more than half of the overall monthly gain.

Outside of energy, we saw more mixed progress on disinflation. On the one hand, prices for used cars, hotel stays, health insurance and recreation services are continuing to come down. Shelter inflation is also receding, albeit at a slow-moving pace, but should help with more of the heavy lifting on bringing inflation down in the next year.

On the other hand, airlines fares, medical care commodities and transportation services all saw increases. The jump in car insurance premiums is a bit surprising to us – but it may be some lagged impact of higher car prices over the past year, with insurance companies just now passing along those costs. While the Federal Reserve pays a lot of attention to the “core services ex-housing” measure as reflecting wage (or sticky) inflation, more than 70% of its year-over-year gain in August came from transportation services alone.

Overall, while higher gas prices may pinch consumer wallets, we wouldn’t worry too much about it impacting inflation or the Fed. Absent any further shock, energy prices should be flat-to-down for the rest of the year as gasoline refining margins ease and summer heat fades. Combined with flat new and used car prices, falling food inflation, and the weight of shelter disinflation, we still think it is likely that the Fed’s target inflation rate falls below 2% before the end of next year, well ahead of their expectations. 

So while this report may be marginally hotter-than-expected, we don’t think it’s nearly enough to change the Fed’s decision next week to keep rates steady, though it does leave a November rate hike on the table. Regardless, we don’t see any signs of a sustained surge in inflation, and with the economy continuing to normalize, I think the Fed would find it pretty difficult to justify any significant further tightening.

Well thank you for listening. For more of our insights on inflation, the economy and investing you can check out our website at jpmorganfunds.com/insights or our mobile app “Insights” by J.P. Morgan Asset Management.

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