What happened: The Consumer Price Index (CPI) rose 0.6% in August after increasing 0.2% in July. Core CPI rose 0.3% month-over-month compared to 0.2% in July.
What it means: Annual price growth increased to 3.7% in August from 3.3% in July, reflecting large increases in energy prices. However, August marked the smallest 12-month increase in core CPI – which excludes food and energy prices – since the period ending September 2021. Treasury yields, which mortgage rates tend to follow, rose on the news.
What Zillow Senior Economist Orphe Divounguy thinks: Today’s report shows progress on the inflation front slowed in August, but does not necessarily indicate that inflation is re-accelerating. Although core CPI inflation is still above the Federal Reserve’s target, annual core inflation continued to moderate. This sustained slowdown in the pace of core price growth reflects the fact that demand and supply are coming into better balance.
The monthly change in shelter costs decelerated to 0.3% in August from 0.4% in July while lodging away from home – hotels and motels – decreased 3% in August alone, its third consecutive decline to reflect the slowdown in consumer spending on leisure. Annual rent increases in CPI may no longer be a major concern for policymakers as rent continues to move lower as predicted by changes in Zillow Observed Rent Index (or ZORI). Rent growth has moved lower due in part to a large increase in new construction – especially multi-family units – that is helping to slowly shrink a large pre-pandemic housing unit deficit.
Despite the August uptick, core inflation is still headed in the right direction. The three-month annualized core CPI rate has fallen to 2.4% which is lower than the six-month annualized rate of 3.7%. Nominal wage growth – often viewed as a leading indicator of inflation – also continues to cool without a meaningful uptick in unemployment. Labor productivity is also on the rise and incomes adjusted for inflation are rising again, which is good news for the housing sector and the US economy over the medium- to long-term.
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