US August Core CPI Held Back by Housing Costs…September Small Cut Likely

In August, the US Consumer Price Index (CPI) continued its five-month decline, reaching the mid-2% range. However, 

In August, the US Consumer Price Index (CPI) continued its five-month decline, reaching the mid-2% range. However, housing costs led to a core CPI increase that surpassed market expectations. With a rate cut expected at the Federal Open Market Committee (FOMC) meeting on September 17-18, the prospect of a 0.5% "big cut" seems unlikely.

On September 11th, the US Department of Labor reported that the CPI for August rose by 2.5% year-over-year. This is the lowest level since February 2021, marking a 3.5-year low and aligning with market forecasts. The CPI has narrowed its increase from July, which was the first time it entered the 2% range since March 2021. On a month-over-month basis, CPI rose by 0.2%, matching expectations and the previous month's figure.

Excluding the volatile components of energy and food, the core CPI increased by 0.3% month-over-month and 3.2% year-over-year. These figures slightly exceeded expert expectations of 0.2% and 3.2%, respectively. The month-over-month rise in core CPI is the highest in four months. From July to August, the annualized core CPI increase went from 1.6% to 2.1%.

The main contributor to the August CPI increase was the rise in housing costs, which increased by 0.5% from the previous month, up from 0.4% in July. Year-over-year, housing costs rose by 5.2%. Food prices increased by 0.1%, while energy prices fell by 0.8%, and used car prices decreased by 0.1%. Clothing prices went up by 0.3%.

The Producer Price Index (PPI), which measures wholesale prices, is expected to rise by 0.2% in August compared to the previous month, slightly exceeding the 0.1% increase in July.

The CPI meeting market expectations and the core CPI exceeding forecasts slightly suggest that the chance of a "big cut" in September has diminished. The current interest rate futures market reflects an 85% chance of a 0.25% rate cut in September and a 15% chance of a 0.5% cut. The probability of a big cut dropped by 19 percentage points from the previous day's 34%. Despite a lower likelihood of a big cut due to the August employment report indicating gradual labor market weakening, the core CPI data reinforces the expectation of a 0.25% rate cut. However, there is consensus on Wall Street that inflation is continuing to trend towards the Fed's 2% target.

With the retreat of big cut expectations, Treasury yields are rising. The yield on the US 10-year Treasury bond has increased by 2 basis points (bp) to 3.66%, while the yield on the more sensitive 2-year Treasury bond is trading at 3.66%, up 5 bp from the previous day.

Steve Sonic, Chief Strategist at Interactive Brokers, commented, "While the CPI data alone is not bad, the unexpectedly high core CPI data was not what the market needed. This has dashed hopes for a 50 bp cut and eliminated those expectations."

The August CPI data and the rise in core CPI have significantly impacted rate cut expectations. The increase in housing costs has been a major factor, making a significant rate cut less likely for the September FOMC meeting. Continuous monitoring of interest rate policies and economic indicators will be crucial moving forward.