Consumer price index data for August showed that inflation continued its moderating trend, but the core CPI ran slightly hotter than expected vs. July. The S&P 500 shook off early morning selling and powered higher following the CPI report as investors weighed the implications for next week's Federal Reserve meeting.
CPI Inflation Report Hits And Misses
The overall consumer price index rose 0.2% on the month, matching forecasts. The 12-month CPI inflation rate fell to 2.5% from 2.9% in July, below 2.6% expectations.
However, the core CPI, which strips out volatile food and energy prices, rose 0.3% vs. July levels, above 0.2% forecasts. Yet the 12-month core CPI inflation rate held at 3.2%, as expected. The core CPI inflation rate peaked at a 40-year-high 6.6% in September 2022.
On an unrounded basis, the core CPI rose 0.28% in August.
More CPI Details
Energy prices fell 0.8% in August, while food prices rose a slim 0.1%, holding down headline inflation.
Core goods prices fell 0.2% on the month and 1.9% from a year ago. Prices for new vehicles were flat in August, but down 1.2% from a year ago. Prices for used cars and trucks fell 1% from July and 10.4% on the year.
However, core services prices rose 0.4% on the month and 4.9% from a year ago. Owner's equivalent rent, or the implied amount a property owner would have to pay in rent, rose 0.5%, the most since January.
Hotel and motel prices rose 2% from July. Overall transportation services prices rose 0.9%, as airline fares rose 3.9%.
Meanwhile, medical care services prices dipped 0.1%.
"The stickiness of services inflation at around 5% y/y will be one reason why the Fed will not be cutting rates at an aggressive pace," Fitch Ratings chief economist Brian Coulton wrote after the CPI data.
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Fed Rate-Cut Outlook
After the CPI inflation data, markets were pricing in 15% odds of a half-point Fed rate cut at the Sept. 18 Fed meeting, down from 29% ahead of the report. Over the year's final three Fed meetings, odds of at least a full percentage point in rate cuts fell to 81% from 91%. Markets now see 35% odds of 1.25 percentage points in cuts, down from 54%.
Markets expect at least one half-point rate cut at one of the upcoming Fed meetings, but probably not next Wednesday. That's despite softer-than-expected hiring in September and downward revisions to prior months' job growth.
At Jackson Hole, Wyo., last month, Federal Reserve Chairman Jerome Powell said that the Fed didn't want the labor market to get any softer, but that's exactly what the September jobs report showed. The expected reaction would be to ramp up the pace of rate cuts, which is what markets initially expected after last Friday's jobs report. But Fed Gov. Christopher Waller provided a reality check when he seemed to back just a quarter-point move.
CPI Vs. PCE Inflation
CPI data provides about 70% of the Fed's primary inflation measure, the core PCE price index. The balance comes from the producer price index, including prices for health care. PPI data out Thursday at 8:30 a.m. will allow economists to sharpen their estimates for August's core PCE price index, which will be released on Sept. 27.
In the 12 months through July, core PCE inflation ran at a 2.6% rate, well below the 3.2% core CPI inflation rate. One big reason for the disparity is that housing costs, which have continued to outpace core inflation as a whole, account for 43% of the core CPI basket but less than 18% of core PCE outlays.
After Wednesday's CPI, Nomura economist Aichi Amemiya and colleagues are still forecasting a tame 0.13% monthly rise in the core PCE price index. They expect a 2% dip in the PPI measure of airfares to help hold down core inflation.
S&P 500
The S&P 500 fell more than 1% in morning trade but finished 1.1% higher in Wednesday stock market action after the August CPI inflation data.
The S&P 500, after falling 4.25% last week, has climbed 2.7% so far this week, reclaiming its 50-day moving average. That leaves the S&P 500 2% off its July 16 record closing high, but up 16.4% for the year.
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