Hot, Hot, Hot! Core Inflation Comes In Hotter Than Expected (50 BPS Rate Cut Likely Off The Table)

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Feelin’ hot, hot, hot! Inlfation that is.

Following last month’s modest miss in CPI which sparked speculation about a 50bps cut, which was then boosted by the jobs report miss and the huge downward revision, moments ago the BLS reported that – as only a handful of Wall Street strategists warned – CPI actually came in hotter than expected at the core level, rising 0.3% MoM vs expectations of a 0.2% print, with all remaining metrics coming in line, to wit:

  • CPI 0.2% MoM (or 0.187% unrounded), Exp. 0.2% – in line
  • CPI Core 0.3% MoM (or 0.281% unrounded), Exp. 0.2% – hotter than expected
  • CPI 2.5% YoY, Exp. 2.5% – in line
  • CPI Core 3.2% YoY, Exp. 3.2% – in line

And visually, here is the headline print, where the annual CPI increase dropped to just 2.5% from 2.9%, the lowest since February 2021…

.. and the core….

…. as goods deflation is stalling and may even print positive in the coming months, while core service inflation remains the biggest driver.

That was s the 51st straight month of MoM increases in Core CPI, and a new record high.

Under the hood, used car prices fell 1.0%, moderating from last month’s 2.3% drop, while airline fares jumped 3.9%, a big reversal to last month’s bizarre -1.2% drop. Car insurance costs jumped another 0.6%, after rising 1.2%; furniture prices dropped 0.3% reversing last month’s 0.3% rise.

Perhaps more worrying is the fact that while rent inflation has flatlined, shelter inflation posted its first increase since early 2023!

  • August Shelter inflation up 0.43% MoM and up 5.23% YoY vs 5.05% in July
  • August Rent Inflation up 0.39% MoM and up 4.97% YoY vs 5.09% in July

And the first monthly increase since March 2023 highlighted:

Last, but not least, and perhaps most ominous of all, is that while inflation refuses to be “killed” even as the Fed is about to start cutting rates, Supercore CPI rose 0.33% MoM, the biggest monthly increase since April, driven by continued acceleration in transportation services, which jumped the most in 5 months.

Finally, money supply growth is reaccelerating…

Which begs the question: how long until the Fed’s next easing cycle unleashes the Arthur Burns fed:

Putting it all together:

  • Underlying inflation unexpectedly picked up, as core CPI increased 0.3% from July, the most in four months, and 3.2% from a year ago
  • Only five of the 65 forecasts in Bloomberg’s survey called for a 0.3% increase in the core CPI. Almost everyone else was at 0.2%, and four had it at 0.1%. The five were right.
  • Shelter prices, the largest category within services, climbed 0.5%, the most since the start of the year and the second month of acceleration, defying widespread expectations for a downshift. Owners’ equivalent rent — a subset of shelter and the biggest individual component of the CPI — rose at a similar pace.
  • Airfares rose a hefty 3.9% in August after falling for the previous five months while costs for energy and used vehicles fell
  • Risk assets pumped and dumped and bond yields rose. S&P 500 futures dropped steeply immediately after the report came out, before paring losses. The yield on 10-year Treasuries advanced two basis points to 3.66%. The dollar wavered.

And while one can stick a fork in the market’s hopes for a 50bps rate cut (odds slumped from 30% to 20%… and from 50% last Friday)…

… the question remains: will the Fed really cut rates as shelter inflation inflects higher for the first time since 2023.

After last night’s ABC Presidential debate. Where Kamala acted like she was auditioning for part in the movie “Mean Girls” and the ABS moderators acted like pure Soviet-era Russian journalists.

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Published by confoundedinterest17

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