US August CPI Up 2.5% YoY... Weight on 'Small Cut'

Market Expectations Met... Core CPI Exceeds Forecast

The U.S. consumer price index (CPI) inflation rate fell for the fifth consecutive month last month, dropping to the mid-2% range. As inflation continues to slow toward the Federal Reserve's (Fed) target of 2%, a rate cut is all but certain at the Federal Open Market Committee (FOMC) meeting scheduled for the 17th-18th.

[Image source= Xinhua News Agency]

On the 11th (local time), the U.S. Department of Labor announced that the August CPI rose 2.5% year-on-year, matching market expectations (2.5%). After the July increase entered the 2% range for the first time in 3 years and 4 months since March 2021 (2.6%), the rate of increase narrowed again within a month.

Compared to the previous month, the CPI rose 0.2%, in line with the forecast (0.2%) and the prior month's figure (0.2%).

The core CPI, which excludes volatile energy and food prices to show the underlying inflation trend, rose 0.3% month-on-month and 3.2% year-on-year. Experts had predicted increases of 0.2% and 3.2%, respectively, so the month-on-month increase exceeded expectations. In July, the increases were 0.2% and 3.2%, respectively.

Although the CPI inflation rate slowed, most of last month's increase was driven by a significant rise in housing costs. Housing costs rose 0.5% month-on-month, an increase from July's 0.4%. Year-on-year, housing costs increased by 5.2%. Food prices rose 0.1%, while energy prices fell 0.8%. Used car prices dropped 0.1%, and clothing prices rose 0.3%.

With the CPI meeting expectations and the core CPI slightly exceeding market forecasts, the market now views a 'big cut' of 0.5 percentage points in interest rates this month as unlikely. The interest rate futures market currently prices in an 85% chance of a 0.25 percentage point Fed rate cut in September and a 15% chance of a 0.5 percentage point cut. Just the day before, the probability of a big cut was 34%, but it plunged 19 percentage points in one day.

Josh Jamner, investment strategy analyst at ClearBridge Investments, said, "This will be a disappointing indicator for the short-term bond market, which had expected a 250 basis point rate cut by the end of 2025," adding, "While today's less favorable data won't prevent the Fed from normalizing its rate policy next week, it could change the framework of the debate."