August CPI –  A Bit Hotter Than Expected

  • August CPI came a bit higher than expected but close enough that Treasuries are trading with a positive tone as the event risk has been successfully navigated. We discuss the CPI numbers in more detail below, but the increases were relatively isolated (gas and transportation costs) that it doesn’t signal a broad rebound in inflation pressures. Presently, the 10yr Treasury is yielding 4.27%, down 2/32nds in price while the 2yr is yielding 4.99%, up 2/32nds in price.


  • August CPI came in a touch hotter than expected, but it shouldn’t be enough to upset the Fed’s expected pause at next week’s FOMC meeting. The overall rate increased 0.6% (0.631%) MoM matching expectations and driving the YoY pace to 3.7% from 3.2%. The energy complex accounted for more than half the increase as gas rose 10.6%. Most of the other items increased, or decreased, in line with recent trends which should provide some comfort that we’re not seeing a broad-based advance in prices.


  • The core rate increased 0.3% (0.278%) which was higher than the 0.2% expectation and breaks a two-month stretch at the 0.2% pace.  The YoY pace did dip to 4.3%, as expected, vs. 4.7% in July and is the lowest YoY print since September 2021. The services component rose 0.4% vs. 0.3% for the last three months. You can’t, however, blame Owners Equivalent Rent for the uptick in services as its monthly increase was 0.4% vs. 0.5% in July and with the lagged nature of OER we should continue to see that monthly pace moderate. With a 25.62% weighting in CPI, that moderation in OER should help to keep monthly gains in check.  Also, base effects will help as the September report will see a 0.6% monthly increase roll-off just like we saw for the August report. That could lead to a 3-handle YoY rate for September. We shall see.


  • Transportation costs increased 2.6% vs. -0.1% in July as airline fares rose 4.9% vs. -8.1% in July, and with a 17.19% weighting that increase forced services costs to increase over the month. Core services ex-housing, which has been a recent focus for Powell, rose 0.37% vs. 0.20% in July on the back of that pop in transportation costs (see graph below). That increase could provide some ammunition to keep a rate hike on the table for the November or December meeting, but it would probably need other elements coming in hot to force that rate hike to happen.


  • While the core rate came in a bit higher than expected, and the overall ticked up as expected, but at a solid 0.6% pace, the increases were relatively isolated with most categories still posting increases or decreases that fit with recent trends. OER will continue to moderate and that will be a big driver in limiting inflation prints in the months ahead. On net, this report will keep the Fed talking “higher-for-longer” and “plenty of work remains” so that part won’t change, but it does play into the pause for next week while keeping a rate hike in play for November and December.

Core Services Ex-Housing

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.82 5.55 5.50 5.50 5.62 6.08
0.50 5.81 5.52 5.44 5.39 5.48 5.97
1.00 5.80 5.49 5.41 5.35 5.39 5.84
2.00 5.48 5.35 5.27 5.27 NA
3.00 5.22 5.21 NA
4.00 5.16 NA
5.00 5.12 NA
10.00 NA

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Published: 09/13/23 Author: Thomas R. Fitzgerald