US Inflation Rises Again – Will Rates Follow?

“The
inflation
report
was
good
news
overall,”
says
Preston
Caldwell,
chief
US
economist
at
Morningstar.
“That’s
because
core
inflation
continues
to
normalise.”

Core
inflation,
which
excludes
the
volatile
food
and
energy
components,
fell
to
its
lowest
levels
since
March
2021,
with
the
three-month
percentage
change
falling
to
2.4%
annualised
–
almost
in
line
with
the
Fed’s
2.0%
target.

“With
core
inflation
continuing
to
normalise,
the
Fed
will
very
likely
refrain
from
another
rate
hike
in
its
September
meeting
next
week,”
Caldwell
says.

The
Bureau
of
Labor
Statistics reported that
the
Consumer
Price
Index
increased
3.7%
in
August
from
year-ago
levels—a
rise
from
July’s
3.2%
rate
but
well
below
the
June
2022
peak
of
9.1%.
Core
CPI
rose
4.3%
in
August
over
the
past
12
months
after
climbing
4.7%
in
July.

The
headline
rise
of
3.7%
came
close
to
economists’
expectations
of
3.6%.
The
core
CPI
reading
matched
expectations.
From
month-ago
levels,
CPI
rose
0.6%
in
August
after
rising
0.2%
in
July.
Core
CPI
rose
0.3%
after
rising
0.2%
in
July.

Within
the
report,
the
index
for
gasoline
was
the
largest
contributor
to
the
monthly
all-items
increase,
accounting
for
over
half
the
total
gains.
Energy
prices
rose
5.6%
overall
in
August
after
increasing
0.1%
the
prior
month.
Utility
(piped)
gas
service
prices
gained
0.1%,
fuel
oil
prices
increased
9.1%,
gasoline
prices
rose
10.6%,
and
electricity
prices
climbed
0.2%.

Oil
prices
rose
from
about
$70
per
barrel
at
the
beginning
of
July
to
$81
per
barrel
at
the
beginning
of
August,
Caldwell
notes,
which
drove
the
higher
gasoline
prices.

“We
would
be
concerned
about
higher
energy
inflation
if
we
thought
it
was
likely
to
persist,”
Caldwell
says,
“But
that’s
unlikely
to
be
the
case.”

Caldwell
adds
that
oil
prices
have
risen
further
over
the
past
month,
which
he
says
will
likely
create
a
further
bump
in
the
energy
component
in
the
September
and
October
CPI
reports.
“After
that,
oil
prices
should
likely
fall,
as
indicated
by
futures
prices
as
well
as
the
low
likelihood
that
Saudi
production
cuts
persist
indefinitely,”
he
says.

In
addition,
Caldwell
thinks
electricity
prices
will
also
likely
fall
after
a
hot
summer.

Within
core
inflation,
shelter
inflation
fell
to
4.5%
annualised
in
the
past
three
months,
with
core
inflation
excluding
shelter
at
0.9%.
“Both
the
shelter
and
nonshelter
components
are
finally
falling
in
concert,”
Caldwell
says.

“The
deceleration
in
shelter
inflation
has
further
room
to
run,”
he
adds.
“Market
rent
growth
has
averaged
about
zero
since
the
start
of
2023,
owing
to
increased
housing
supply.
Housing
inflation
in
the
CPI
responds
to
market
rents
with
a
lag.”

Core
goods
inflation
was
negative
2%
annualized
in
the
past
three
months,
according
to
Caldwell’s
measure.
“This
disinflation
should
persist,
as
used-car
prices
are
likely
to
fall
further
in
coming
months,”
he
says.
“Prices
for
other
goods
are
flat
or
falling
owing
to
the
resolution
of
supply
chain
issues.”

Certain
components
of
core
inflation
remain
sticky,
according
to
Caldwell.
He
notes
that
cable
and
TV
streaming
prices
increased
4.7%
in
the
past
three
months
on
an
annualized
basis,
and
motor
vehicle
insurance
increased
at
a
27%
annualized
rate,
“which
is
a
lagged
response
to
the
runup
in
vehicle
prices
and
thus
unlikely
to
last
for
much
longer.”

“We
also
saw
higher
energy
prices
have
a
pass-through
effect
on
core
prices
in
August,”
Caldwell
says.
Airfare
prices
jumped
in
August
after
falling
in
prior
months,
owing
to
higher
jet
fuel
prices.
“This
caused
most
of
the
uptick
in
the
month-over-month
core
inflation
rate
in
August
compared
to
July.”

On
the
services
side,
“falling
wage
growth
should
put
a
lid
on
core
services
ex-housing
going
forward,”
Caldwell
says.

Fed
Likely
to
Hold
Rates
in
September,
Cuts
Expected
in
2024

“Today’s
report
should
rule
out
a
Fed
hike
in
September,”
Caldwell
says.
“We
think
only
a
trend
reversal
in
core
inflation
would
induce
the
Fed
to
continue
hiking
rates.”

Nearly
all
market
participants—97%—expect
the
federal-funds
effective
rate
target
to
hold
steady
at
its
current
range
of
5.25%
to
5.50%,
according
to
the
CME
FedWatch
Tool’s
reading
as
of
11
a.m.
Eastern
time.
A
month
ago,
90%
of
market
participants
foresaw
the
rate
holding
steady,
with
the
remaining
10%
expecting
the
Fed
to
raise
rates
to
a
range
of
5.50%
to
5.75%.

The
key
question
now,
according
to
Caldwell,
is
when
the
Fed
will
start
lowering
interest
rates.

“We
still
expect
[rate
cuts]
to
come
in
early
2024,”
he
says.

Inflation
has
already
fallen
greatly
without
a
slowdown
in
economic
growth,
down
to
roughly
half
its
summer
2022
peak
levels.
“The
growth
slowdown
that
we
expect
by
the
first
half
of
2024
should
provide
a
further
disinflationary
impulse
and
push
the
Fed
to
begin
loosening
monetary
policy,”
Caldwell
says.

Markets
are
split
over
whether
the
Fed
will
keep
rates
where
they
are
or
raise
them
further
by
December.
For
the
March
2024
Fed
meeting,
48%
of
market
participants
expect
the
rate
to
stay
at
its
current
range
of
5.25%
to
5.50%,
while
27%
of
participants
expect
a
range
of
5.50%
to
5.75%
by
March.
Roughly
20%
of
participants
expect
the
Fed
to
have
lowered
rates
to
a
range
of
5.00%
to
5.25%
by
the
March
2024
meeting.

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