Inflation rose slightly more than expected in August, potentially putting the possibility of a deeper cut by the Federal Reserve at risk in interest rates next week. The consumer price index rose 0.2% in August, the US government reported on Wednesday.
The Consumer Price Index (CPI) rose 2.5% from a year earlier in August, a slowdown from the 2.9% annual increase in July and the lowest annual rate since early 2021. The annual increase was also in line with economists’ expectations.
The index rose 0.2% from the previous month, matching both the monthly increase in July and what economists had expected.
In terms “underlying”, Excluding more volatile food and gasoline costs, August prices rose 0.3% from a month earlier and 3.2% from a year earlier. Core prices rose 0.2% month-over-month and 3.2% year-over-year in July.
Although inflation has moderated, it has remained above the Federal Reserve’s 2% target on an annual basis. However, recent economic data, including signs of a weakening labor market, point to a near-certain rate cut by the end of the Fed’s next policy meeting on Sept. 18.
“The time has come to tighten policy,” Fed Chairman Jerome Powell said at the Kansas City Federal Reserve’s annual economic symposium in Jackson Hole, Wyoming, last month.
The question now is how much the Fed will tighten policy when it comes to cutting rates.
As of Tuesday, markets were pricing in a nearly 100% chance that the Federal Reserve would cut interest rates by the end of its September meeting. However, immediately after the data was released, the odds of a 50-basis-point cut versus a 25-basis-point cut were split 73/27, compared with the 56/44 probability calculated by traders last week, according to the CME FedWatch tool.
Inflation and the Fed rate
For analysts, nothing in the August CPI report will dissuade the Federal Reserve from cutting a key short-term rate at the end of its meeting next Wednesday.
Federal Reserve officials are widely expected to make their first interest rate cut in more than four years next week, and Wednesday’s inflation data is the final piece of the economic puzzle before that decision.
Jorge Ángel Harker, international markets analyst at Adcap, points out in a conversation with this media that the inflation data serves to clarify to the market whether at the next meeting of the Federal Reserve, scheduled for the 18th of this month, It is the first cut in what will be the start of a downward cycle in rates. Yes it will be 25 or 50 bps.
“Today’s data was 2.5% compared to the expected 2.6%. Although it may initially be seen as a very good figure, as it is close to the Fed’s target of 2%, core inflation shows that it has reached 3.2%, as expected by analysts,” he said.
This data shows that inflationary forces are somewhat persistent and would therefore lead the Fed to be more cautious, eliminating the possibility of an aggressive 50 bps cut.
Source: Ambito
