Hot August CPI Report Doesn't Shift the Rate-Cut Needle

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The latest Consumer Price Index (CPI) report showed that President Donald Trump's tariff policies continue to have a moderate impact on cost pressures, but the Federal Reserve is still expected to lower the federal funds rate when it meets next week.

According to the Bureau of Labor Statistics, headline CPI was up 0.4% month over month in August, higher than the 0.2% rise seen in July and the 0.3% increase economists expected.

The CPI was 2.9% higher year over year, a quicker pace than the month prior and the largest annual increase since January. Still, the results arrived in line with estimates.

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Shelter was the "largest factor" behind the monthly increase in headline CPI, according to the BLS, up 0.4% from July to August. Energy costs were also on the rise last month, up 0.7% as gas prices jumped 1.9%.

Core CPI, which excludes volatile food and energy prices and is seen as a better measure of underlying inflation trends, was up 0.3% month over month and 3.1% year over year. Both figures matched what was seen in July and were on par with economists' forecasts.

"We continue to expect the Fed will cut rates next week due to weak labor market data and think it could follow this up with further easing in October," says Simon Dangoor, head of Fixed Income Macro strategies at Goldman Sachs Asset Management.

Dangoor adds that while "near-term inflationary pressures remain high, and further strong readings are likely in the coming months as businesses run down inventories and pass on cost rises, the Fed is likely to draw comfort from anchored inflation expectations and the absence of overheating in the labor market, which reduce the risks of second-round effects."

According to CME FedWatch, futures traders are now pricing in a 91% chance the Fed will issue its next quarter-point rate cut at its meeting next week, up from 86% one month ago. The betting odds are for two additional cuts by the end of the year.

With the August CPI data now in the books, here's some of what economists, strategists and other experts around Wall Street have to say about the results and what they could mean for investors going forward.

Experts' takes on the August CPI report

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"Thursday's CPI was in line with expectations and will not derail the Federal Reserve's expected rate cut at the September meeting. It's clear that inflation is relatively calm, which gives the Fed the flexibility to focus more on stemming ongoing weakness in the labor market. While inflation is still running above ideal levels, the full employment portion of the Fed mandate is carrying much more weight." – Skyler Weinand, Chief Investment Officer at Regan Capital

"Right now, inflation is a key subplot, but the labor market is still the main story. Today's CPI may appear to offset yesterday's PPI, but it wasn’t hot enough to distract the Fed from the softening jobs picture. That translates into a rate cut next week – and, likely, more to come." – Ellen Zentner, Chief Economic Strategist for Morgan Stanley Wealth Management

"The last bolt on the gate has fallen out and the rate-cutting horse is about to leave the barn. The Fed's path is clear in the short run, but over the medium term, the fact that core inflation is running quite a bit higher on a month-over-month basis is going to complicate matters and the market knows this. Watch the market reaction today, because all things being equal, a rate cut should be very bullish for the market, but the 0.4% month-over-month inflation rate is much too high for a sustained rate cutting cycle and it will now be an issue of how many more times can the Fed cut if inflation does not head toward their 2.0% year-over-year target." – Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management

"For the first time in a long time, CPI is being overshadowed on its release day by another data series: initial jobless claims. A spike in initial jobless claims to the highest level in 4 years helped briefly push the 10-year Treasury below 4% this morning, despite a larger-than-expected increase in the consumer price index. This dynamic illustrates the Fed's focus on the 'maximum employment' half of the dual mandate, with today's inflation print not hot enough in our view to derail a 25 basis point interest rate cut at next week's FOMC meeting." – Josh Jamner, Senior Investment Strategy Analyst at ClearBridge Investments

"In today's numbers, we are seeing some impact from tariffs, especially with higher prices on cars and clothes. A sticky category not as connected to trade is insurance which we expect to weigh on inflation for the next few months. The hot inflation print will not likely change the Fed's plan to cut rates in September but it's possible the Fed will hold in October if inflation expectations no longer look well-contained." – Jeffrey Roach, Chief Economist for LPL Financial

"As expected, consumer inflation rose to the highest level since January, driven by price increases in shelter and food. There was not much surprising in the report, but the increase in food prices happened at the fastest pace so far this year. Housing has been a consistent source of inflation. Much of this year, Chair Powell has noted that risks to price stability and full employment were equally balanced. After the meaningful jobs revision last week, many believe that the risks to full employment now outweigh the risks to prices. The Fed probably sees that as well, but today's inflation report likely means a modest 25-point decrease rather than a larger cut." – Scott Helfstein, Head of Investment Strategy at Global X

"Inflation is in line with expectations but still running hot. Core CPI at 3.1% is still stubbornly high, and while in-line expectations set us up for a rate cut in September, I believe the market pricing in 3 is too much given the performance of equity prices and high overall inflation. Watch out for developments in the Middle East. Higher oil prices can put the Fed in a tough position when we already saw higher food and shelter prices." – Jason Barsema, Co-Founder and President at Halo Investing

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With over a decade of experience writing about the stock market, Karee Venema is the senior investing editor at Kiplinger.com. She joined the publication in April 2021 after 10 years of working as an investing writer and columnist at a local investment research firm. In her previous role, Karee focused primarily on options trading, as well as technical, fundamental and sentiment analysis.