The August Consumer Price Index (CPI) data for the United States revealed that headline inflation matched forecasts, but the core rate rose more than anticipated. This development has likely sealed the deal for the Federal Reserve to cut its benchmark lending rate by just 25 basis points next week.
Headline CPI: A Matched Forecast
The U.S. Consumer Price Index (CPI) rose 0.2% in August, as per economist forecasts of 0.2%. This marks a continuation of the previous month’s trend, with July’s headline inflation rate also coming in at 0.2%.
Core CPI: A Surprise
However, the core rate, which excludes food and energy costs, rose 0.3% in August, exceeding economist forecasts of 0.2%. This indicates that underlying price pressures remain a concern for monetary policymakers.
Year-Over-Year Comparison
On a year-over-year basis, CPI was higher by 2.5%, as anticipated, but still lower than the previous month’s 2.9% rise in July. The core rate, meanwhile, stood at 3.2%, matching expectations and mirroring the previous month’s level.
Bitcoin Price Reaction
The release of the inflation data led to a marginal decrease in the price of bitcoin (BTC), which fell by 1.5% over the past 24 hours to $56,500. This decline was relatively minor compared to other markets, but still reflected investors’ caution ahead of the Fed’s upcoming decision.
Traditional Markets Reaction
In traditional markets, U.S. stock index futures continued their downward trend, with both the S&P 500 and Nasdaq down by 0.5%. The U.S. 10-year Treasury yield rose 3 basis points to 3.68%, while the dollar index increased by 0.15%. Gold prices also dipped 0.45% to $2,532 per ounce.
Investor Expectations
Ahead of the data release, investors had priced in a 71% chance that the Fed would trim its benchmark fed funds rate range by 25 basis points to 5%-5.25%, with a 29% chance of cutting by 50 basis points to 4.75%-5%. The persistence of core inflation, as reflected in this morning’s report, is likely to solidify expectations of the Fed moving by the lower amount.
FedWatch Odds Update
Indeed, just 15 minutes following the CPI release, the chances of the Fed cutting by 25 basis points next week jumped to 85%. Looking further out, the odds that the Fed slashes rates by just 75 basis points by year-end rose to 14% from 9% one day ago.
Key Takeaways
- The headline U.S. CPI matched forecasts for August, but the core rate rose more than anticipated.
- This development has likely sealed the deal for the Federal Reserve to cut its benchmark lending rate by just 25 basis points next week.
- The persistence of core inflation is a key concern for monetary policymakers and suggests that the Fed may opt for a smaller rate cut.
Investment Implications
The release of the CPI data has provided valuable insights into the current state of inflation in the United States. Investors should continue to monitor market trends and adjust their portfolios accordingly, keeping a close eye on the upcoming Fed decision.
