August’s consumer price index report was released on Sept. 11, revealing a stable decline in inflation, while raising concerns regarding the Federal Reserve’s potential rate-cut plan.
“Today’s CPI report [serves] as evidence that the last mile of inflation needs to be handled with care and caution – a formidable reason to default to a 25 basis point reduction,” said Seema Shah, chief global strategist at Principal Asset Management.
The CPI continued to rise by 2.5% in August compared to last year’s month. Additionally, it increased by 0.2% from July’s report, aligning precisely with expectations.
The leading contributor to this increase appears to be shelter, with a 0.5% rise in August and a significant 12-month increase of 5.2%. Transportation services also contributed, with a 0.9% monthly rise and a 7.9% annual increase—the highest among all categories.
Grocery prices remained steady, with food values increasing by 0.1% in August and 2.1% annually. However, food at home saw no change this month, while food away from home rose by 0.3%, reflecting a 4.0% annual increase.
Core CPI, excluding volatile components like food and energy, increased by 0.3% on the month, surpassing the 0.2% estimate. However, the year-over-year increase of 3.2% aligned with expectations.
These figures reflect a stable inflation environment, with prices rising as expected, though the core inflation shows a bit more upward pressure than expected.
As a result, markets started adjusting. Two- and 10-year Treasury Yields are at their lowest levels in more than a year. Investor uncertainty has caused the Volatility Index, Wall Street’s preferred volatility gauge, to rise to around 18.
Historically, a VIX level above 20 indicates higher market volatility, while levels below 20 suggest relative calm.
As a result, the S&P 500 and the Dow Jones Industrial Average initially declined but later rebounded, and moved back into the positive.
Although inflation continues to ease, the persistent pressures in core inflation leave the Fed with a challenging decision on its next move in monetary policy.
“This isn’t the CPI report the market wanted to see,” Shah added. “With core inflation coming in higher than expected, the Fed’s path to a 50 basis point cut has become more complicated.”
