A report released by the Labor Department on Wednesday showed that inflation fell to the lowest level since February 2021 in August. The report also showed that a key indicator was higher than expected, laying the foundation for the Federal Reserve to expect a 25 percentage point interest rate cut.
The U.S. Bureau of Labor Statistics reported that the Consumer Price Index, a broad measure of the cost of goods and services across the U.S. economy, rose 0.2% for the month, in line with the Dow Jones consensus.
That left the 12-month inflation rate at 2.5%, down 0.4 percentage points from July’s level and slightly below expectations of 2.6% and the lowest in 3.5 years.
However, the core Consumer Price Index (CPI), which excludes volatile food and energy prices, rose 0.3% for the month, slightly above expectations of 0.2%. The 12-month core inflation rate remained at 3.2%, in line with forecasts.
A slight increase in core consumer prices put the Fed on guard against inflation, which could negate the possibility of more aggressive interest rates when policymakers meet next Tuesday and Wednesday.
“This is not the CPI report that the market wanted to see. With core inflation higher than expected, the Fed’s path to a 50 basis point rate cut becomes more complicated,” said Seema Shah, chief global strategist at Principal Asset Management.
After the report was released, the stock market plummeted and Treasury yields were mixed. However, the market rebounded later in the day, recouping losses and with all major indexes turning positive.
In the federal funds futures market, traders are pricing in an 85% chance that the Federal Open Market Committee will approve a 25 percentage point, or 25 basis point, rate cut at the end of its Sept. 18 meeting, according to CME Group’s FedWatch indicator. A month ago, the market was leaning towards a 50 basis point rate cut.
“This number certainly won’t be a barrier to policy action next week, but hawks on the committee will likely seize on today’s CPI report as evidence that last-mile inflation needs to be handled with caution and caution – This is a strong reason for breach of contract.
While data shows inflation continues to slow slowly, housing-related costs remain an issue. The housing component of the CPI, which accounts for about one-third of the index’s weight, rose 0.5% and accounted for about 70% of the core gain. The housing index rose 5.2% compared with the same period last year.
Food prices rose just 0.1%, while energy costs fell 0.8%.
Elsewhere in the report, used car prices fell 1%, health care services fell 0.1% and clothing prices rose 0.3%. Egg prices rose 4.8%.
The U.S. Bureau of Labor Statistics said in a separate press release that real earnings also increased this month, with average hourly earnings increasing by 0.2% more than the monthly CPI increase. On a 12-month basis, average hourly earnings, adjusted for inflation, increased 1.3%.
However, the Fed’s attention has recently turned to the labor market slowdown. Since April, job creation has slowed to nearly half of what it was in the previous five months. Central bankers say preventing a broader economic slowdown is now as important as fighting inflation, which reached its highest level in more than 40 years in the summer of 2022.
Regardless of what the Fed decides at the end of next Wednesday’s meeting, markets are already pricing in lower interest rates. U.S. Treasury yields, especially those on the 2-year and 10-year notes, are at their lowest levels in more than a year. A recession indicator known as the inverted yield curve has recently reversed course, a move that typically signals a Fed rate cut and a slowing economy.
10-Year Treasury Bond Yield
Wednesday’s report provided more evidence that inflation is easing, but remains above the Fed’s 2% target. Prices in some areas will either remain high or move higher.
“Even though inflation has eased, it doesn’t mean that the prices of things people are buying have actually gone down,” said Lisa Sturtevant, chief economist at Bright MLS. “It just means that prices aren’t rising as fast. In fact, prices are not rising as fast. , American consumers now pay more than 20% more for goods and services than before the pandemic.”
For example, airline fares rose 3.9% in August after falling in the previous five months. Motor vehicle insurance also continued to gain ground, rising 0.6%, pushing the 12-month gain to 16.5%. Hospital and related service costs rose 0.4%, up 5.8% from last year.
At the same time, falling energy costs helped lower the inflation figures. Gasoline prices fell 0.6% in August and were down 10.3% from a year earlier, part of a 4% decline in the energy index, which included a 12.1% drop in fuel oil prices.
