US DATA PREVIEW: Analysts See August Inflation Picking Up

By Holly Stokes and Sara Haire

HIGHLIGHTS: 

-Recent string of overestimated CPI could suggest softer reading than

forecasted, but Harvey could spell an end to the trend.

-Headline CPI to be boosted by rise in energy prices from Harvey, but brunt of

effect to come in September. After Wednesday's PPI report indicated a 3.3% gain

in energy prices, analysts' expectations about energy prices could be right on

target. 

-Core CPI forecasted at 6-month high of +0.2%, to be driven by rebound in

lodging after July's unexpected drop - but would still set up year/year for a

dip from 1.7% to 1.6%. However, PPI's report of a further 2.8% decline in

lodging casts doubt on a rebound.

-Analysts see rebound in core CPI month over month as critical for FOMC's

decision on December hike, though the impacts of the hurricanes casts some

doubt.

     WASHINGTON (MNI) - Analysts are forecasting a strong 0.3% gain in August

for the headline CPI, up from a weaker than expected 0.1% reading in July due to

a jump in energy prices, as suggested by Wednesday's PPI report that showed a

3.3% gain in energy prices. Meanwhile, Core CPI is expected to rise 0.2%,

breaking the recent string of 0.1% gains. 

     Recently, CPI has been consistently softer than expected, with last month

being no exception.   But if this month's forecasts are correct, core CPI will

post its strongest increase since a 0.2% gain in February. However, as Societe

Generale notes, even if core CPI posts a 0.2% increase, it will be below its

strong reading of 0.3% a year ago - causing the year over year rate to drop from

1.7% to 1.6%. 

Last August, analysts underestimated both the CPI headline and core number, with

0.1% and 0.2% increases, respectively. The actual numbers ended up being a tenth

of a percentage point higher for each. However, only two years ago, in August of

2014, both CPI headline and core were overestimated with the headline number

forecasted as unchanged, and actually registering a decline of 0.1%, while core

CPI was estimated to post a 0.2% gain, but saw a smaller 0.1% gain instead. And

in the past five months, analysts have consistently overestimated CPI. The

recently soft inflation data suggests to analysts that even a slight uptick in

prices would deliver the needed gain, thus why they are predicting a gain of

0.3% for the headline number. However, this report comes on the heels of a

softer than expected 0.2% gain for PPI's final demand, perhaps foreshadowing a

miss for CPI on Thursday. 

     Despite overestimates and soft inflation data becoming a trend in recent

months, analysts remain hopeful that an upswing in energy prices will be enough

to boost inflation out of its recent slump. While analysts agree that the

majority of Harvey's impact on gas prices will be seen on September inflation,

they do believe that there will be moderate upward pressure on headline CPI.

With weekly retail pump price data showing that August's seasonally-adjusted gas

prices increased by 6% month over month, Capital Economics believes this

expected rise in energy will be enough to ensure a 0.2% increase to headline

CPI. Societe Generale echoes this focus on energy, stating that a possible 2.9%

increase in the energy index would boost headline CPI to a 0.4% gain.

     Analysts also look for inflation to be strengthened by components such as

communications, apparel, rent, and lodging. In particular, analysts are closely

watching lodging to see if hotel fares rebounded after the unexpected 6% drop in

the last two months. Comerica explains that as occupancy rates may have remained

elevated, that the decline was likely only a "statistical quirk," and thus now

expects a large rebound for August. While many analysts expect this solid

rebound, Morgan Stanley argues that industry data suggests continued declines in

lodging. Considering Wednesday's PPI report, which showed hotel services

declining a further 2.8%, analysts' expectations for a rebound could be

misguided.

     Despite question marks surrounding lodging prices, analysts are still

predicting a rise in the headline number as well as the core number. However,

analysts remain skeptical on whether or not price pressures excluding food and

energy will remain soft. While analysts predict that new and used auto prices

may have moderated slightly from last month's 0.5% decline in both categories,

Credit Suisse states that a combination of declining auto sales and an

oversupply of used autos will continue to drag vehicle inflation - which makes

up over 7% of core CPI. Morgan Stanley also watches for a reversal from July's

0.7% rise in airfare, as well as an end to strong prints in medical care

services.

     Analysts see a renewed strength in CPI as critical for the FOMC's decisions

on a December rate hike, and as the final step towards a September balance sheet

normalization. Due to Fed officials' continued emphasis on a need to see

sequential increases in inflation figures, Societe Generale believes that if

core CPI comes in as forecasted that it will relieve concerns and increase

likelihood of a rate hike before the year's end. However, analysts such as

Credit Suisse warn that another weak inflation post would severely hurt chances

of a December rate hike, as concerns mount that low readings are not being

driven by only transitory factors. 

     While many analysts report that the Fed should still be on track for a

year-end hike, Amherst Pierpont contends that bond markets have already priced

low odds on a December hike - having 23 basis points priced in until the end of

2018. Thus, Amherst Pierpont cautions that a rebound of 0.2% in core CPI could

actually be a difficult shock for markets to absorb at current rate levels. 

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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