The release of US inflation for August rounded up the key indicators that the Federal Open Market Committee will have in front of it when deciding on whether to raise interest rates tomorrow. The main numbers were roughly in line with expectations, with only core inflation year-on-year slightly below what was expected.
The year-on-year headline inflation rate was 0.2%, which confirmed the absence of inflation pressures in the economy. The core inflation rate came in much higher at 1.8%. While the headline inflation rate was much depressed mainly because of lower energy prices, the core inflation rate was helped higher by very buoyant housing and rent costs. Interestingly, if one excludes housing costs from the core index (after already excluding food and energy), the rate drops from 1.8% to 0.9%. Therefore if one strips the price index from the components that are having a more temporary impact (energy and housing), inflation should not be a serious worry.
Month-on-month, headline inflation was -0.1% while the core increased by 0.1%. Obviously the volatile energy markets could also be impacting inflation and muddying the picture for the months ahead.
The absence of anything worrying in the inflation release strengthened the argument of those in favor of dollar interest rates staying at zero. The dollar lost some ground against the euro as the single currency climbed back towards 1.13 (1.1298 was the high). Short-term interest rates were also down a little as the 2-year Treasury note, which is sensitive to interest rate expectations, fell to 0.78% from 0.80% the previous day. The dollar did better versus the yen, as stocks were in a holding pattern after a strong day the previous session.