Inflation Report Dashes Hopes for Jumbo Rate Cut Next Week

Inflation showed signs of slowing in August, aligning with analyst expectations. The consumer price index (CPI) reported by the Bureau of Labor Statistics revealed a 2.5% increase compared to the same time last year. This rise is consistent with forecasts and marks a decrease from July’s 2.9% rate.

While headline inflation eased, core inflation, which excludes food and energy prices, saw an unexpected uptick. Core CPI rose to 0.3% from the previous month’s 0.2%, influenced largely by increased housing costs. This unexpected increase in core inflation may reduce the likelihood of a significant interest rate cut by the Federal Reserve in their upcoming meeting.

The CME FedWatch tool, which assesses the market’s expectations regarding interest rate changes, currently indicates only a 15% chance for a larger 50-basis-point cut. This is a shift from perceptions following the August jobs report, which had suggested a more aggressive approach could be on the table.

Skyler Weinand, the chief investment officer of Regan Capital, commented, “Wednesday’s CPI came in as expected giving the Federal Reserve the go ahead to still cut interest rates at the September meeting, albeit by a more shallow 25 basis points.” He emphasized that the Fed’s intention is to initiate a rate-cutting cycle in response to rising unemployment and to mitigate concerns that they may already be reacting too late.

From July to August, the consumer price index rose by 0.2%, maintaining the same monthly increase as anticipated. Year-over-year, core CPI remained unchanged at 3.2%, matching forecasts and remaining stable compared to July’s figures.

Among the elements impacting overall inflation, housing costs remain significant. In August, the shelter component saw a slight acceleration, increasing by 5.2% compared to 5.1% in July. Month-over-month, shelter rose by 0.5% following a 0.4% increase previously.

Conversely, energy prices have seen notable decreases recently. In August, the energy index fell by 4% compared to the previous year, a shift from a 1.1% increase in July. Month-over-month, the energy index decreased by 0.8% following no change in July.

Grocery prices, which have significantly impacted consumers, appear to be stabilizing. The food index increased by just 0.1% from July to August after rising 0.2% in both June and July. The food-at-home index remained unchanged month-over-month, following a slight uptick of 0.1% in July. However, the cost of eating out saw a more rapid increase of 0.3%, up from a 0.2% rise in the previous month.

On an annual basis, the food index also saw a 2.1% increase compared to August of the previous year, showing a smaller rise than July’s 2.2% increase.

Recent labor market data may influence the Federal Reserve’s decision as well. Reports from the Bureau of Labor Statistics highlight that unemployment rates fell from 4.3% in July to 4.2% in August, alongside a cooling in job growth over the summer months.

Federal Reserve Chair Jerome Powell noted in a recent press briefing that, “The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market.” He suggested that if conditions align, a reduction in policy rates could be expected soon.

Additionally, Powell remarked, “We will be data-dependent but not data-point-dependent, so it will not be a question of responding specifically to one or two data releases.” This indicates a careful and measured approach by the Federal Reserve as it navigates the complexities of inflation and employment.

Source: Business Insider