Implications: Like yesterday's report on producer prices, consumer prices came back with a vengeance in August, rising 0.6%. Energy, which was up 5.6%, drove the lion's share of the price increases. Excluding energy, prices were up 0.1%, the same gain as the "core" CPI, which excludes food and energy. The overall CPI is up only 1.7% in the past year, while "core" prices are up only 1.9%, both lower than the Federal Reserve's 2% objective. But don't pop the champagne just yet. We expect inflation to pick up to 3%+ by the end of next year. Monetary policy is loose and rising housing costs (which are measured by rents, not asset values) are going to put upward pressure on the core CPI. Owners' equivalent rent was up 0.3% in August (the most for any month since 2008) and is up 2% versus a year ago. The ongoing shift from home ownership toward rental occupancy should boost this inflation measure even more in the year ahead. It's important to recognize that inflation getting above the Fed's stated objective will not change the Fed's monetary policy anytime soon. The Fed is now focused on the labor market and will allow inflation to exceed its supposed objective for a prolonged period of time. On the earnings front, "real" (inflation-adjusted) wages per hour were down 0.7% in August but are unchanged from a year ago. Worker hours are up 2% in the past year, which means their purchasing power is still growing.
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