The Labor Department reported Tuesday morning that consumer prices inched upward in August from July, mostly because of higher housing costs and medical care, as inflation continues to remain mild in the U.S. The report was largely in line with expectations as the investment community looks ahead to the meeting of the Federal Open Market Committee, which begins today and concludes tomorrow with a much anticipated policy statement and press conference with Fed Chairman Ben Bernanke.
The all-items Consumer Price Index rose 0.1 percent in August, following a 0.2-percent climb in July. Compared to last August, the index increased 1.5 percent after climbing 2.0 percent year-over-year in July. The headline reading matched economist expectations.
The so-called “core” CPI, which excludes the volatile food and energy categories, also rose 0.1 percent in August. Compared to last August, the core CPI increased 1.8 percent, its biggest increase in five months. In each of the three months prior, core CPI increased 0.2 percent. The rise will likely curb any deflationary concerns for central bank policymakers during their meeting and add to the idea that slowing the pace of stimulus will be manageable for the economy. The Fed targets 2 percent inflation and will interpret the steady rise as a strengthening economy.
The Fed currently buys $85 billion each month in Treasuries and mortgage-backed securities as a means of stimulating the economy while keeping interest rates at historic lows. Most analysts believe that the Fed will trim its purchases back by about $10 billion per month, with the announcement expected tomorrow afternoon.
The indexes for shelter (+0.2%) and medical care services (+0.7%) accounted for most of the rise in both the all-items CPI and core CPI. Within the shelter category, the rent index rose 0.4 percent. In the medical space, hospital services rose 1.9 percent. Hospital services posted the largest increase compared to last August out of the major categories, rising 5.7 percent.
Equaling the increase in July, the food index rose 0.1 percent in August, led higher by the fruits and vegetable index rising 1.2 percent. After rising 0.2 percent the month prior, the energy index declined 0.3 percent in August, mostly because of a sharp drop in natural gas costs. The gas and electricity indexes declined slightly, although fuel oil prices jumped 1.3 percent.
The new vehicles index was unchanged in August after rising 0.1 percent in July and 0.3 percent in June. Year-over-year, the index is up 1.1 percent.
The markets don’t seem concerned anymore about tapering, extending gains generated over the past two weeks. The Dow Jones Industrial Average is up 45 points, the S&P 500 is 6 points higher and the tech-rich Nasdaq has advanced 16 points about one hour into Tuesday’s session. The S&P 500 is only about 10 points away from making another all-time high with a run that has only included one down day in the past 11.