August Inflation Data Keeps a September Rate Hike in Play: What to Know
The August CPI report is the last inflation update the Fed will see before next week's policy meeting. Here's what economists are saying about the data.
The August Consumer Price Index (CPI) report is the last inflation update the Federal Reserve will see before it meets next week. After the August jobs report came in much better than expected and lifted odds of a September rate hike, this week's inflation data carries an outsize significance for the Fed and its upcoming policy decision.
According to the Bureau of Labor Statistics (BLS), headline inflation rose 0.4% from July to August, faster than the 0.1% increase the month prior but in line with economists' forecasts.
The August CPI was up 3.4% year over year, the same as July and matching estimates.
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Higher gas prices were a major factor in the monthly inflation increase, with the index for gasoline rising 3.9% in August. Year over year, gas prices were up 27.4%. Shelter and food costs were also higher.
Rate-hike odds are notably higher after the results. CME Group FedWatch shows futures traders are pricing in an 85% probability the Fed will hike the federal funds rate by 25 basis points next week, up from 71% one day ago.
What is the CPI?
"CPI is a measure of the average price of that basket of goods and services over time," writes Kiplinger contributor Coryanne Hicks. "The specific goods and services within the CPI basket are based on information that around 24,000 families and individuals give the U.S. Bureau of Labor Statistics on what they buy."
The two primary measures of CPI are headline, which is the total inflation rate experienced by households, and core CPI, which excludes volatile food and energy prices.
Core CPI came in at 0.3% on a monthly basis in August, up from 0.2% in July. Year over year, core inflation was up 2.4%, slower than the 2.5% from the previous month and in line with economists' estimates.
Costs for communication, travel, education, and used cars and trucks were all higher in August, while prices dropped for medical care and motor vehicle insurance
With the August CPI report on the books, we looked at what economists, strategists and other Wall Street experts are saying about the data and what it means for the Fed and the economy. These outlooks, edited at times for brevity, are below.
Wall Street weighs in on the August CPI report
"Financial markets have been nervous about rising inflation pressures for weeks, and this morning's report on consumer prices will keep those concerns alive. Rising consumer prices increase the probability of a Fed hike next week that will likely kick off a series of hikes over the next 6 months. Broadly, Fed hikes in the middle of an earnings boom seem unlikely to dismantle the overall bull trend for stocks but may elevate volatility and weigh on segments of the market." - Gina Martin Adams, Chief Market Strategist at HB Wealth
"The August CPI release was the last piece of puzzle ahead of next week's FOMC rate decision and today's cements a hike as the base case. Underneath the hood, core inflation remained fairly mixed with modest goods inflation, continued shelter disinflation, but strong services ex-shelter inflation (aka Supercore). Taken together, the details of the report suggest that underlying inflationary pressures continue be sticky and the Fed will have to hike in order to help inflation return toward the 2% target." - Jeff Schulze, Head Investment Strategist at Franklin Templeton Institute
"Unfortunately, there is a building narrative in the bond market that the Fed is behind the curve and the Treasury is powerless to drop longer-term rates from rising. This CPI report isn't going to help. In my view, the Fed absolutely needs to hike at the September meeting. Otherwise, these narratives really risk getting out of control, which could cause unnecessary damage to the economy." - Tom Graff, Chief Investment Officer of financial advisory firm Facet
"The survey period predates the latest move higher in energy prices, with Brent crude climbing above $100 as tensions around the Strait of Hormuz persist. It also comes before commodity strength broadened beyond energy into areas such as metals and agriculture. A clean inflation print today does not eliminate the possibility of stronger price pressures down the road. An in-line print keeps the Fed in play without forcing its hand, which is why investors are likely to remain focused on Warsh's communications, or lack thereof, energy prices, labor market data, and what comes next rather than what was released today." - Alexandra Wilson-Elizondo, Global Head and Co-Chief Investment Officer of Multi-Asset Solutions at Goldman Sachs Asset Management
"Core inflation isn't moderating. Categories like used car prices, airfares and shelter are all showing signs of sticky inflation. With the labor market tight, it's hard for the Fed to avoid hiking next week. The situation has gotten more inflationary since August. Big energy moves this week alone make last month's CPI a bit irrelevant. Price pressures have intensified and are passing through to core." - David Russell, Global Head of Market Strategy at TradeStation
"Friday's CPI print was in-line with expectations, but inflation is still too hot, and the Federal Reserve's hands are tied. A rate hike next week is all but assured. Consumer prices are going in the wrong direction, and remain significantly higher than the Fed's 2% target. We may see several rate hikes over the coming months in an effort to get short-term interest rates in line with where the market is pricing yields." - Skyler Weinand, Chief Investment Officer at Regan Capital
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