US: Inflation edges up but remains below target - ING

US inflation misses on the downside, but price pressures will build, according to James Knightley, Chief International Economist at ING.

Key Quotes

“US consumer prices rose 0.1% MoM/1.7% YoY in July for both headline and core (excluding food and energy) inflation last Friday. This was below the 0.2% MoM/1.8% YoY predicted by the market, but we and probably a lot of other people had suspected the lower figure would be the likely outcome following Thursday’s softer-than-anticipated producer price inflation report.”

“The details showed that energy price falls remain the main drag with lower fuel costs also probably contributing to the softer prices for transportation services. Housing continues its very benign run, rising just 0.1% MoM, but this too is energy related – due to lower fuel and utility prices. Meanwhile, the cell phone contracts price war continues and has subtracted 0.2 percentage points from the headline annual rate of inflation.”

“The Federal Reserve doves will seize on this subdued headline reading as further evidence backing the case for a period of stable interest rates. Nonetheless, Friday’s outcome ends four consecutive months of deceleration, and we think further rises in inflation are likely in the months ahead.”

“The 10% fall in the dollar since the start of the year will help nudge up import costs while rising commodity prices will soon see a reversal in the energy component. With the economy adding jobs and some very nascent evidence of a pick-up in wage growth we still think inflation will be back above the 2% target before the end of the year. As such a December rate hike remains on the cards in our view.”