In-line US CPI sees September odds slip
July's US inflation report landed almost exactly where markets, and we, had anticipated. Headline CPI rose 0.1% MoM, rebounding from June's -0.4% decline, while the annual rate eased from 3.5% to 3.4%.
Core prices rose 0.2% on the month, leaving the annual measure a tenth lower at 2.5%, with all readings matching consensus. Still, as we warned ahead of the release, such an outcome likely favours no change in rates from the Fed.
Markets have seemingly reached a similar conclusion too post-event, with a modest pullback in hiking bets weighing on the dollar at the margin.
Admittedly, signs of softening weren’t just confined to headline numbers, with CPI details telling a similarly benign story. Shelter rose just 0.1% MoM, as did food, with gasoline prices falling 2.9%. Granted, airfares jumped 2.2% in July, while medical care costs climbed 0.4%. But taken as a whole, the energy-induced upward pressure on prices continued to unwind last month, with little evidence for a broadening inflation dynamic that would concern Fed officials.
That being said, some caution is still needed. Oil prices surged more than 20% last month as peace talks between the US and Iran fell apart, with Tehran insisting the Strait of Hormuz stays shut until its demands are met.
While not evident in the July figures, August data is likely to see greater impact. In our view, however, this alone is not enough for the FOMC to hike rates next month, despite July seeing three of twelve policymakers voting for a hike.
After last week's payrolls showing a 23k fall in jobs, today’s CPI creates a high bar for Chair Warsh to skew hawkish at Jackson Hole later this month, and without that, a September rate increase looks improbable in our eyes.
Having seen the July CPI data, traders have started to reach a similar conclusion. Markets entered today pricing September as a 50/50 proposition – those odds now sit below 40%. The dollar, in turn, has slipped back, albeit only marginally, with the DXY shedding two tenths post-event before partially retracing.