US CPI August Commentary

Updated August 9, 2022

US CPI August Preview

We get the latest US inflation data release on Wednesday. Hopes are high that price pressures may be abating in the headline print. But the core rate is expected to stay near 6% year-on-year which means the Fed should remain in policy tightening mode until the end of the year.

Recent sharp falls in gasoline prices are set to offer some respite to the rapid price rises we have seen in the last few CPI reports. Some PMIs have also been indicating lessening price pressures while year-ago base effects will shift to pulling rates lower. The headline inflation rate is forecast to rise just 0.2% on a monthly basis. This would be the smallest increase since January 2021 and slow the annual figure to 8.7% from 9.1%. But the core rate, which excludes volatile food and energy components, is expected to get a further lift from rising housing costs and post a 0.4% monthly gain. This should see keep the year-on-year rate at 6% which is well above the Fed’s 2% target.

After the blockbuster US July jobs report on Friday revealed the full recovery in nonfarm payrolls, markets have priced in another 75-basis point hike for the Fed’s September meeting. Last week’s pushback by numerous FOMC officials that it wasn’t done hiking rates has gained increasing credibility. Recession fears have also abated with accelerating wage growth and unemployment falling back to multi-decade lows.

Focus is now on the inflation numbers and there’s no doubt the pressure will grow on policymakers to hike rates by another jumbo-sized move if core CPI remains hot. Money markets have priced rates to go to 3.5% by year end and the data is likely to bolster these expectations. Indeed, the longer-term drivers of inflation may see further back pedaling by markets for rate cuts next Spring.

US CPI August Post-Data Review

Summer markets have been woken from their slumber with a potentially game-changing US inflation report. While analysts expected another rise on a month-on-month basis, headline CPI was forecast to slow from 9.1% year-on-year to 8.7% in July. It actually eased significantly more than expected to 8.5%, with the month-on-month figure coming in flat, ending a 16-month streak of monthly gains. As expected, energy costs were the main driver, reversing a big chunk of their previous gains.

The core reading was expected to reaccelerate to 6.1% but remained at the June print of 5.9%. The monthly reading was 0.3%, the lowest since September 2021. We note that shelter costs rose 5.7% over the last year, accounting for about 40% of the total increase in all items less food and energy. But July’s core data works out at an annualised 3%, primarily driven by a decrease in services. If we compare that to the roughly 5% average since October last year, we can understand why markets have reacted with glee. Have we finally hit “peak Fed”, “peak inflation” and even “peak dollar”?

US stocks futures have jumped higher as expectations for a jumbo-sized rate Fed rate hike in September have more or less switched odds with a smaller 50 basis point move. The latter is now given a 61% chance. The market also now predicts a lower peak in Fed funds. Dollar selling is strong with EUR/USD notably breaking out of its recent range and trading above 1.03.

Written by Jamie Dutta, Market Analyst for Vantage

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