Core inflation showing signs of resurgence

The V-shaped rebound in the three-month annualised rate confirms the slump in core CPI inflation that began in the spring was mostly due to transitory factors, which are now fading. The annual core inflation rate will remain muted for the rest of this year, but will then rebound sharply next spring. The earlier slump was driven by much bigger than normal falls in prices for wireless telephone services, motor vehicles, physicians’ services and, more recently, lodging away from home. But prices for the first two fell at the slowest pace this year in August, and prices for the latter two rebounded sharply. Accordingly, while we expect the Fed to stand pat for the rest of this year, it will resume monetary tightening next year.