The latest inflation data fortifies expectations for the Federal Reserve to make its first interest rate cut in more than four years next week.
The Consumer Price Index rose 2.5% over last year this August, ticking up just 0.2% from July, the U.S. Bureau of Labor Statistics reported Wednesday. This is the smallest yearly increase since February 2021. The reading for “core” inflation (excluding food and fuel prices) came in at 0.3% month over month and 3.2% above August 2023, in line with economists’ predictions.
The shelter index rose 0.5% in August and 5.2% year-over-year, accounting for over 70% of the total annual increase for all items in the index, less food and energy.
Coupled with last week’s jobs report, which indicated ongoing softening, the inflation figures increase the likelihood the Fed will cut rates at the conclusion of its policy meeting next Tuesday and Wednesday.
“August CPI data likely reinforces the markets' belief that the Fed can prioritize maximum employment over price stability going forward,” First American Senior Economist Sam Williamson said, commenting on August’s CPI report. “The likelihood of a 25-basis point cut next week has jumped to 85.0%, aligning with the Fed's base case.”
Traders remain divided on just how much of a rate cut will take place at the September meeting and how many more cuts the Fed will make during the remainder of 2024.
“Markets are split on whether the Fed will cut rates by 100 or 125 basis points by year-end, with the former slightly favored after today's CPI data,” Williamson said. “Assuming a 25-basis point cut in September, the Fed would then need to follow with rate cuts of additional 75 or 100 basis points respectively in November and December.”
The Fed has been working to reduce inflation since it peaked at 9% in June 2022, hiking up interest rates in an effort to stabilize the economy. It has held its benchmark borrowing rate between 5.25% to 5.50% since July 2023.
The CPI declined for the first time in four years in June 2024.
“The biggest sticking point remains housing,” Williamson said. “Owners' equivalent rent was up 0.5% on a monthly basis and 5.4% annually, everything else has returned to pre-pandemic trends."
