As expected, U.S. inflation ticked up sharply in August, rising 0.6% because of higher energy prices. This was the first increase of any kind since March. Higher gas prices accounted for 80 percent of the increase. Food prices rose 0.2 percent.
The 0.6% increase in August is the ‘headline’ number (CPI-U) that holders of TIPS and I Bonds care about, because it adjusts the principal balance of TIPS upward and eventually sets the inflation-adjustment interest rate on I Bonds. So, in the crooked logic of TIPS investors, a 0.6% increase is a good thing, given the 0.3% decline in infation from April to July.
The Federal Reserve cares about ‘core inflation’ – which strips out the more-volatile energy and food. Core inflation in August was a very muted 0.1%, which should keep the Fed happy. Core consumer prices rose 1.9 percent in the past 12 months, the smallest annual increase in a year.
An Associated Press report notes that food prices have not yet figured into rising inflation:
The modest increase in food prices indicates the drought in the Midwest is not yet pushing up grocery prices. Some economists say that will happen in the comings months.