US Rates: And you’re not gonna reach my telephone

Harry Downie (0:03)

Hi, and welcome to At Any Rate, JP. Morgan's Global Research Podcasts, where we take a look at some of the drivers behind the biggest trends and themes across fixed income currencies and commodities markets. My name is Harry Downie. I'm from our US Rates Strategy team, and today I am joined by Abiel Reinhart from our US Economics team, which is timely as today we just received data from the BLS on how consumer prices rose through the month of August, here in the US.

The inflation data which strips out the volatile food and energy categories came in at 0.29 percent on the month, firmer than consensus expectations, which are around 0.2, and the pricing we saw in inflation markets, which was around 0.25. Abiel, I will kick it over to you first. What was your high level read on the data?

Abiel Reinhart (0:52)

Thanks, Harry. My high level read on the data, as you noted, inflation a little bit firmer than expected.

There was one surprising component in the data, telephone prices, I should say, cell phone service plans, which added about a tenth to core CPI. The core CPI was up 0.29 month on month, leaves the over-year go rate at 2.4 percent. We had been expecting a number closer to clean two-tenths there, so somewhat above our expectations. The cell phone service increase there that we had, that was the big outlier and surprised. Everything else, a little bit more in line with expectations. But of course, you could say that once you take out the things that are surprised, everything's in line with expectations. So we have to look at that as well. And it does highlight that inflation is running, continuing to run, a bit firmer than the Fed would like. I think on CPI, you could say that CPI over a year ago, 2.4%, that's not that bad.

As Chairman Warsh has talked about, what's the number to the left of the decimal point? And I think at 2.4 in isolation, you wouldn't be too concerned. But we're still likely having reasonably above-target inflation on the core PC deflator. We think that will rise on an over a year ago basis in August at a 3.3% rate, so continuing to be quite a bit higher than the CPI number. And if our forecast is right, that number will stay in that 3.3% range through the end of the year. And that is inclusive of some methodological revisions that the Bureau of Economic Analysis is making to PC. Those will probably take off perhaps 2 tenths of a percent.

And so, again, even with that, you're ending up with core PC inflation here, which is considerably above-target, not really going down, again, in our forecast, and consequently on the back of that, we have changed some of our thinking about the Fed, which I think you're going to ask me about.

Harry Downie (3:28)

Yes, absolutely. But thinking about the surprise this month, particularly in CPI data and that surprise we received in telephone services, how durable do you think that is? Do you think we got much of a read from this August print into the trend of inflation going forward?

Abiel Reinhart (3:49)

There are a couple of things that leapt out at me as we think about the pieces going forward. First, for September in isolation, that's likely now to be a soft month. The telephone item, while some of that could reflect some increases actually in service plan prices that have to do with the more expensive cost of telephone hardware off the back of higher memory prices. There's also a pretty decent chance that this is just complete noise.

The BLS has switched to a new methodology for measuring cell phone service plans last year, and ever since then, we've seen a number of unusual spikes. And so if this spike were to reverse next month, you could get a pretty soft reading on the CPI, and that's what we've baked into our forecasts. So that's just the near term. What else stands out to me? On core goods. So we had one of our pieces in forecast is that we would see some renewed acceleration in core goods inflation into the end of the year, in part because technology prices are firming, again, off the back of those memorandum price increases. You continue to have supply chain stress measures be pretty elevated. And you may have a little bit of renewed pickup in some tariffs through the end of the year.

Through the middle part of the year, we hadn't seen that. You had actually seen goods prices decelerating and outright declining. In some instances, tariffs had come off a bit, but that has reaccelerated now. We've had positive price increases for goods over the last couple of months. And so that is more of an upside source of inflation risk now.