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US core prices grew by 0.3% MoM in August, beating consensus estimates that looked for a 0.2% print. Even so, the market reaction to this latest set of inflation data has been relatively muted, especially considering that the Fed is set to begin easing rates next week, and with a non-negligible risk of a 50bp cut still implied by swap markets.
Price action post-release has seen the odds of a jumbo rate cut on September 18th drop from just above 20% to around 10%, while the broad dollar has notched a 0.3% gain. These are relatively small moves when compared with those triggered by other inflation misses seen over the past 12 months.
In part, this is because other headline readings matched consensus expectations. Overall CPI grew by 0.2% MoM and 2.5% YoY. Core CPI, meanwhile, rose 3.2% YoY, unchanged from July. We are also inclined to think that some of the details of today’s report are a little more dovish than the headline core inflation reading suggested at first glance. But largely, we think this reflects the fact that both markets and the FOMC are now focused on the employment side of the Fed’s dual mandate.
With this in mind, today’s data does little to shift our own expectations for Fed easing too. We continue to look for rate cuts of 25bp in September, November, and December.
Examining the details of August’s CPI report, a few points stand out. First, shelter prices rose sharply in August, increasing 0.52% MoM. This was largely responsible for headline core inflation beating expectations. The August rise in shelter costs was led by owner’s equivalent of rent (OER), which climbed by 0.49% MoM, up from 0.36% in July. This was, in fact, the strongest bout of single-month price growth since a 0.56% MoM reading back in January. Sell-side estimates had expected a much softer print of around 0.3% MoM. However, rent of primary residence also exceeded expectations too. After spiking from 0.26% in June to 0.49% last month, markets had anticipated a reversal. This only partially occurred, with rent of primary residence costs growing by 0.37% last month.
That said, given the lagged effects of policy on housing inflation, we are inclined to view this stickiness as a temporary blip in an otherwise disinflationary trend, meaning the FOMC should be comfortable looking through today’s upside surprise.
Admittedly, one counterpoint to our view is that supercore price growth continues to reaccelerate, rising 0.33% MoM in August, up from 0.21% in July. Inflation by this measure had previously landed in negative territory MoM in both May and June. Still, this only leaves supercore inflation running at 1.96% on a 3mma annualised basis – the Fed’s preferred measure of underlying inflation momentum – meaning that the recent supercore rebound is also unlikely to concern policymakers just yet.
Indeed, as we noted ahead of today’s CPI report, with the focus on the labour market, there seemed to be little that the August CPI could do to shift market expectations, even if the data did print hotter than expected. This has largely materialised, with expectations until year-end having only slipped 5bps post-release. Four full rate cuts remain the market base case.
We think a steer from Chair Powell next week will be needed to see further rate cuts priced out. Provided he delivers on this point as we expect, this should unlock another leg of dollar upside.
Underlying inflation momentum rebounded in August, but not to levels that are likely to trouble the FOMC, suggesting a slow and steady easing pace should remain the Fed base case
Author:
Nick Rees, Senior FX Market Analyst