The Sore Spots in Inflation Returned in August

The Sore Spots in Inflation Returned in August 

• Treasury yields are slightly higher this morning as August core CPI came in a bit hotter than expected, dashing hopes of a 50bps cut next week, and the usual sore spots, Owner’s Equivalent Rent and core services, returned as sore spots in August (more on that below). Currently, the 10yr is yielding 3.65% up 1bps on the day, while the 2yr is yielding 3.63%, up 3bps on the day.

 

• Core CPI rose 0.3% (0.281% unrounded) vs. 0.2% expected and that will deal a blow to the 50bps rate cut crowd. The YoY rate remained at 3.2%, which met expectations. Although the 0.3% can be characterized as “moderately low” given the unrounded figure, it still shows inflation at the core level, and especially the sticky components like housing costs and core services ex-housing, bounced higher in August.

 

•  The overall rate rose an as expected 0.2% (0.187% unrounded), matching July’s, with the YoY rate tumbling from 2.9% to 2.5% as a big 0.5% from last August rolled off. A 0.4% will roll off next month which should bring the overall close to 2.0% if a 0.2% or lower is printed for September. After September, the comps will get tougher with 0.1% and 0.2% prints rolling off into year end.  That said, the YoY rate is the lowest since February 2021 while the 3-month annualized average dipped to 1.1%.

 

•  Indexes which increased in August include shelter, airline fares, motor vehicle insurance, education, and apparel. The indexes for used cars and trucks, household furnishings and operations, medical care, communication, and recreation were among those that decreased over the month. We do have to mention that while the food at home category rose a modest 0.1% (2.1% YoY), the food away from home category (think restaurants) rose 0.3% (4.0% YoY). So, if you’re still seeing menu prices increase at your favorite eating establishments it’s not a mirage.

 

• The disappointing part of the report is in the core number which was the highest since April’s 0.292%. Housing costs/ OER refuse to roll over (0.5% vs. 0.4% in July), and core services ex-housing (0.33% vs. 0.21% in July) increased as well. So, the stickiest piece of inflation remained sticky in August. While the YoY rate held at 3.2%, the 3-month annualized rate rose from 1.6% to 2.1%. While a 0.2% print rolled off in August, the next four months will be a mix of 0.2% and 0.3% rolling off into year-end meaning improvement in the YoY rate before 2025 will be grudging at best.

 

• The results seem to set in place for another month the Fed narrative that “more needs to be done” on the inflation mandate, which will most likely keep a 25bps rate cut as the prohibitive favorite for next week’s FOMC meeting.

 

• We get PPI tomorrow with benign numbers expected, but perhaps more importantly with both CPI and PPI in hand it will allow analysts the opportunity to begin estimating PCE inflation numbers, and while the PCE report will come after the FOMC meeting members will no doubt be aware of the estimates.

 

• At this point the only thing that could resurrect a possible 50bps rate cut would be an outsized increase in tomorrow’s weekly jobless claims (227k expected) and a fall off in retail sales due next Tuesday but moderate strength is expected (0.3% Control Group expected, matching July), so it will take a big miss to generate any momentum for a 50bps cut. While odds of a larger than 25bps cut have been dimmed by this CPI report, futures still see 100bps in cuts by year-end (see graph below). Hope springs eternal, I guess.

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Core CPI Remains Stuck at 3.2% YoY While Overall CPI Continues Lower

Source: Bloomberg

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Core Services Ex-Housing (Super Core) Remains Sticky in August

Source: Bloomberg

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The Rollover in Owner’s Equivalent Rent Reversed in August

Source: Bloomberg

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Futures Market Still Sees 100bps in Rate Cuts By Year-End

Source: Bloomberg