Core CPI up 0.2% as Expected - Headline CPI down 0.1%, First Drop Since 2006

Core CPI increased 0.2% MoM seasonally adjusted, the Bureau of Labor Statistics reported today. This brings the un-adjusted 12-month number to 2.5%.

Core CPI is regarded by the Fed as the key indicator when setting the Federal Funds Rate, which is also set to be reported today. The 3-month annualized average has Core inflation at 3.4% which is above the Fed’s comfort zone. Although the recent crisis in the credit markets will probably prevent the Fed from increasing rates.

The headline CPI provided a slight shock today when it came in at -0.1% MoM. This represents the first decline in consumer inflation since October 2006 and brings the un-adjusted annual rate to 5.4%, below expectations of 5.5%.

This drop was due in part to the 3.1% fall in energy prices in August. However, energy is still up 27.2% over the last year. Transportation costs also weighed on the Index, down 1.5% MoM.

The increase in food costs continues; up 0.6% in August, 6.1% over the last 12 months.

Market reaction in the US Dollar is hard to judge due to other high volatility data, credit concerns and the forthcoming FOMC Interest Rate Statement. However, the US Dollar is trading slightly higher against the Euro and UK Pound on an intra-day basis.