The U.S. Department of Labor released a report on Wednesday, September 11th, showing that the Consumer Price Index (CPI) rose by 2.5% year-on-year in August, hitting the lowest level in three years. This was in line with expectations as it increased by 0.2% from the previous month, matching the forecasts of the Dow Jones. However, due to the core CPI exceeding expectations, it is widely anticipated in the market that the Federal Reserve will cut interest rates by 25 basis points this month.
The latest report from the Department of Labor revealed that the CPI in August grew by 2.5% compared to the same period last year, lower than July’s 2.9% and below the anticipated 2.6%.
Excluding the volatile food and energy prices, the core CPI in August rose by 0.3% compared to the previous month, exceeding the expected 0.2%, and increased by 3.2% year-on-year, aligning with expectations.
Despite the continued slow easing of inflation, housing-related costs remain a concern. Housing costs carry significant weight in the CPI index, accounting for about one-third. Data from the Department of Labor showed that housing costs increased by 0.5% compared to the previous month in August and grew by 5.2% year-on-year.
In August, the food index increased by 0.1% month-on-month and by 2.1% year-on-year. Energy prices saw a decrease in August, dropping by 0.8% compared to the previous month and declining by 4% year-on-year. New car prices remained flat month-on-month and decreased by 1.2% year-on-year, while used car prices decreased by 1% compared to the previous month and by 10.4% year-on-year.
According to the FedWatch indicator by CME Group, traders in the federal funds futures market believe there is an 85% likelihood that the Federal Reserve will approve a 25 basis points rate cut at the interest rate meeting on September 18th.
Brian Jacobsen, Chief Economist at Annex Wealth Management, stated that with core inflation slightly picking up, it is less likely that there will be a 50 basis points rate cut. The Federal Reserve’s approach to cutting rates may mirror their strategy of initially reducing by 25 basis points and then potentially expanding the rate cut if necessary. While a rate cut exceeding 25 basis points may raise concerns for many, the impact should be considered alongside the policy statement and press conferences held after each meeting.
Ben Vaske, Senior Investment Strategist at Orion, commented that the lower-than-expected CPI announced this morning confirms the Fed’s stance on the need for rate cuts as the economy reaches this point. The Federal Reserve is currently shifting its focus towards employment rather than inflation, which seems reasonable given the recent labor reports falling short of expectations and the downward adjustment of previously reported employment data by the Bureau of Labor Statistics. It is still widely anticipated that the Fed will cut rates by 25 basis points next week.
Chris Larkin, Managing Director of Trading and Investing at Morgan Stanley, noted that the market generally expects a 25 basis points rate cut by the Federal Reserve next week. Today’s CPI data largely aligns with the target, which will play a significant role in determining the extent of the rate cut. This may disappoint investors hoping for a larger rate cut, but as inflation appears to be under control, the focus of the market is likely to shift back to economic growth, especially regarding employment conditions.