August CPI up 2.5% YoY... Lowest in 3.5 Years
Core CPI Rises 0.3% MoM, 'Exceeds Expectations'
The US consumer price index (CPI) inflation rate fell for the fifth consecutive month last month, dropping to the mid-2% range. However, core CPI inflation exceeded market expectations due to rising housing costs. With a rate cut all but certain at the Federal Open Market Committee (FOMC) meeting scheduled for the 17th-18th, analysts say the possibility of a 'big cut'?a 0.5 percentage point reduction?is now off the table.
On the 11th (local time), the US Department of Labor announced that the August CPI rose 2.5% year-on-year. This is the lowest level in three and a half years since February 2021, matching market forecasts (2.5%). After the July inflation rate entered the 2% range for the first time in three years and four months since March 2021 (2.6%), the increase narrowed again within a month. The CPI rose 0.2% month-on-month, matching both the expected figure (0.2%) and the previous month's figure (0.2%).
Excluding the volatile energy and food sectors, the core CPI, which shows the underlying trend of inflation, 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 rise was the highest in four months and exceeded expectations. In July, the increases were 0.2% and 3.2%, respectively. Accordingly, the annualized core CPI inflation rate over the past three months rose from 1.6% in July to 2.1% in August.
The main driver of last month's CPI increase was the expanded 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%. Energy prices fell 0.8%, and used car prices dropped 0.1%. Clothing prices increased by 0.3%.
The producer price index (PPI), a wholesale price indicator to be released the following day on the 12th, is expected to rise 0.2% month-on-month in August, slightly exceeding July's increase of 0.1%.
With the CPI meeting expectations and core CPI slightly exceeding expert forecasts, the market now views a big cut 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. Although the August employment report suggested a gradual slowdown in the labor market, lowering the chances of a big cut, the core CPI exceeding expectations on this day cemented the outlook for a 0.25 percentage point cut. However, Wall Street's dominant view is that inflation is steadily slowing toward the Fed's 2% target, so there is no disagreement that the battle against inflation has been won.
As expectations for a big cut retreat, government bond yields are rising. The US 10-year Treasury yield, a global benchmark for bond yields, rose 2 basis points (1bp = 0.01 percentage points) from the previous trading day to 3.66%, while the 2-year Treasury yield, sensitive to monetary policy, rose 5 basis points to trade around 3.66%.
Steve Sosnick, chief strategist at Interactive Brokers, said, "On its own, the CPI data is not bad, but the higher-than-expected core CPI figure was an unwelcome number for the market. It poured cold water on hopes for a 50bp cut, and now all such expectations have disappeared."
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