Inflation wars: US economy stronger than many expected, offers possible signs of NZ’s path

US car insurance and medical care got more expensive in August, but used cars and trucks were cheaper. Photo / Sylvain Sonnet

US inflation overall was up in August, mostly due to high petrol prices, in moves a local economist says will likely impact New Zealand’s next big set of inflation data.

The Consumer Price Index (CPI) in the US rose 0.6 per cent in August, three times faster than it did in July.

Petrol was the biggest contributor to the headline figure but core inflation, excluding fuel and food, was down.

“Headline inflation was quite strong for the month. It’ll be a feature of our own CPI in the September quarter as well,” Westpac senior economist Darren Gibbs said.

Gibbs said core US inflation at 0.3 per cent in August was more reassuring but annual inflation at 3.7 per cent in America showed more work was needed.

“What they need to see obviously is a bit more cooling in some parts of the service sector, as is the case here in New Zealand.”

Gibbs said the US wasn’t experiencing the same sorts of housing market pressures New Zealand was.

US indexes for rent were up in August but the index for lodging away from home was down.

“They’ve got house prices falling and their rental inflation is not as high as it is in New Zealand.”

Food prices in the States were up 0.2 per cent in August, as they were in July. That was well below New Zealand’s 0.5 per cent jump in August.

Year-on-year food prices in the US were up 4.3 per cent, compared to 5.4 per cent in New Zealand.

Gibbs said with regard to adverse events impacting food prices, the US had not had an event comparable in its impact on the national economy to Cyclone Gabrielle.

The US had rebounded from the Covid-19 pandemic more vigorously than many expected, and in contrast to generally sluggish economic performances in Europe and China.

“The US is really the strong man at the moment,” Gibbs said.

But he wondered how long the US economy could stay strong if Europe started weakening and China’s economic growth stayed listless.

The US central bank will get a chance next week to exercise its key lever for tackling inflation.

But many analysts expect the Federal Reserve and its chairman Jerome Powell to keep that country’s version of the official cash rate in the 5.25 to 5.5 per cent range.

“It won’t be an aggressive easing. It’s going to be a gradual easing,” Gibbs said.

Devon Funds this morning said in a note that US inflation came in slightly higher than estimates on an annual basis.

“Stripping out energy and food prices, annual core inflation was unchanged as expected but marginally higher on a month-on-month basis.”

Devon Funds said oil prices had been nudging nine-month highs, and energy prices rose 5.6 per cent on the month, with petrol prices surging more than 10 per cent.

Food prices rose 0.2 per cent and appeared to be easing slightly at least, the investment management firm added.

“Core inflation is what the Fed tends to look at,” Devon Funds said.

“The print has therefore not upset the view that the central bank will leave rates on hold when it meets next week.”

Headline inflation accelerated above expectations even though core CPI continued to edge lower, Fat Prophets said in commentary this morning.

“The net impact was muted with bets on the Fed’s interest rate path little changed.”

Fat Prophets said eyes were now on retail sales due out tomorrow, which should provide insights into how the US economy and consumers have been faring.

John Weekes is online business editor. He has covered courts, politics, crime and consumer affairs. He rejoined the Herald in 2020, previously working at Stuff and News Corp Australia.