US inflation coming off the boil as prices increase slowly in August

Fruits for sale at a Walmart store, California, U.S. (Photo: CFP)

Underlying U.S. consumer prices increased at their slowest pace in six months in August as used motor vehicle prices tumbled, suggesting that inflation had probably peaked, though it could remain high for a while amid persistent supply constraints.

The broad slowdown in price pressures reported by the Labor Department on Tuesday aligns with Federal Reserve Chair Jerome Powell's long-held belief that high inflation is transitory. Still, economists cautioned it was too early to celebrate and expected the U.S. central bank to lay out plans in November to start scaling back its massive monthly bond-buying program.

The consumer price index (CPI), excluding the volatile food and energy components, edged up 0.1 percent last month. That was the smallest gain since February and followed a 0.3-percent rise in July.

"Inflation remains troublingly strong, even if it is not exploding like it did earlier in the year," said James McCann, deputy chief economist at Aberdeen Standard Investments in Boston. "If we continue to see further step-downs in inflation over the next six months, that should ease the pressure on the Fed to quickly follow tapering with interest rate rises."

The so-called core CPI was held back by a 1.5-percent decline in prices for used cars and trucks, which ended five straight monthly increases. Robust rises in prices of used cars and trucks as well as services in industries worst affected by the COVID-19 pandemic were the key drivers behind a heating up of inflation at the start of the year.

Airline fares plunged by 9.1 percent in August, likely as a resurgence in infections, driven by the Delta variant of the coronavirus, sapped demand for air travel. There were also decreases in motor vehicle rentals and insurance.

In the 12 months through August, the core CPI increased by 4 percent after advancing 4.3 percent in the 12 months through July. Economists polled by Reuters had forecast the core CPI would gain 0.3 percent for the month and increase by 4.2 percent year on year.

Stocks on Wall Street were trading lower. The dollar fell against a basket of currencies. U.S. Treasury prices rose.

Supply constraints remain

In addition to the price surge for used cars and trucks appearing to have run its course, hotel and motel accommodation prices are now above the pre-pandemic level, suggesting moderate gains ahead.

Prices for hotels and motels accommodation fell by 3.3 percent after shooting up 6.8 percent in July. Some of the price plunge was probably because of the soaring coronavirus infections.

But bottlenecks in the supply chain remain and the labor market is tightening, pushing up wages. There were a record 10.9 million job openings as of the end of July, forcing companies to boost wages as they compete for workers.