Core CPI beat clears the bar for a September hike
August's US inflation report has delivered the upside surprise that we, like markets, had identified as likely decisive for next week's FOMC meeting.
Headline CPI rose 0.4% MoM, matching consensus, leaving the annual rate unchanged at 3.4%. Core prices, however, rose 0.3% MoM against a consensus of 0.2%, the firmest reading since April, even as the annual core measure eased a tenth to 2.4% as anticipated.
In light of this data, we are updating our Fed call and now expect to see a rate hike delivered next week. We will be reviewing our call for subsequent decisions post-meeting.
Looking through today’s release, energy once again did the heavy lifting at the headline level. Gasoline jumped 3.9% last month, accounting for over a third of the monthly increase as Hormuz disruption continues to feed through to the pump. Meanwhile, shelter re-accelerated from 0.1% in July to 0.3%, airline fares rose 2.7%, while both new and used vehicle prices climbed, with declines in medical care and motor vehicle insurance the only meaningful offsets. Most worryingly for Fed officials, the upside surprise in core was led by a sharp jump in supercore components, which rose 0.51% in August.
This offers the clearest evidence yet that the energy shock might now be feeding into core prices, the very dynamic we noted was absent from July's report.
Add last week's 162k payrolls beat, a hawkish readthrough from yesterday's PPI, and 10-year yields pushing towards 5.0%, and it is hard to see how the FOMC could otherwise justify standing pat. Chair Warsh used his Jackson Hole speech to stress that underlying inflation had not improved, and Governor Waller explicitly tied a possible hike to a hot August print, meaning the September debate should now be settled. Assuming Warsh sticks with his preference for offering minimal market guidance, the dot plot will be key to determining whether this is a one-off insurance move or the start of something more.
The prospect of future tightening, we think, remains up for debate. Some of the core strength sits in volatile categories such as lodging away from home, while rents and owners' equivalent rent rose just 0.2% apiece. Nor can the political dimension be dismissed, with mid-term elections less than two months away and a President who has made no secret of his preference for lower rates. As such, we would caution against extrapolating further out, even with Brent through $107 yesterday and risks biased to the upside.
For now, front-end yields are higher on the release, with September hike odds having risen from roughly 70% pre-data, now standing at around 90%.
The dollar is also benefitting, and a hike delivered despite political pressure would help counter the debasement narrative that has dogged the greenback since the Treasury's buyback announcement. As such, we see the DXY holding above 99 into Wednesday, with hawkish projections the main upside risk to watch for next week.