By the numbers
- The consumer price index edged up by 0.2% in August, in line with the consensus forecast for the month. Core inflation, which excludes more volatile food and energy prices, rose by 0.3%, a touch higher than expectations.
- On a trailing one-year basis, the index has been consistently declining since March. That trend continued in August, with headline consumer inflation retracing from 2.9% in July to 2.6%.
- The one-year change in core inflation held steady at 3.2%, owing largely to the stickiness of underlying shelter costs, which have been slower to recede than anticipated.
Next up: The Fed
- The August CPI report provides just a bit more for Fed policymakers to think about as they head into next week’s FOMC meeting but contained no game-changing data.
- From a big-picture perspective, the 0.3% decline in consumer inflation last month provides additional reassurance that the worst inflation scare in the United States in several decades appears to be firmly in the rearview mirror.
- That allows the Fed to turn its attention to the second element of its dual mandate, focusing increasingly on the evident slowdown in the pace of job creation and broader evidence of weakening in labor conditions.
- Even so, Fed policymakers will need to carefully forecast where inflation heads from here, particularly the core readings that carry more weight in their analysis.
- Headline CPI has benefited from declining energy costs over the past year and a marked slowdown in the pace of grocery price hikes. Conversely, core inflation remains elevated, lifted predominantly by the high and rising cost of housing. Other data suggests that rental rates have leveled out, although that’s not yet apparent in the government data, which usually lags to both the upside and downside.
- That should bode well directionally for inflation measures, but how much weight will the Fed place on the probability that lower housing inflation is already baked into the cake over the next year? That remains to be seen.
The cut: 25 or 50?
- Unexpectedly weak data on job creation in recent months, along with considerable downward revisions to previous gains, reflects a marked slowdown in the pace of job creation and could signal greater risk ahead for the labor market. Job creation hasn’t stalled completely but has slowed to a pace in recent months that trails the monthly trend during the latter stages of the pre-2020 economy.
- A clear weakening in labor market conditions had prompted whispers of the potential need for the Fed to move a bit more aggressively and kick off their easing cycle with a half-point cut. That appears increasingly unlikely, with a quarter-point cut now being the prevailing view for Fed observers and the futures market.
- That’s not to suggest that the Fed doesn’t have plenty of room to cut rates in the coming months. Policy remains quite tight for an economy in which labor momentum has cooled considerably and the central bank’s 2% inflation target appears to be in sight. Cutting by 50 bps now — particularly with no attempt by policymakers to talk the markets into anything beyond a quarter-point cut — could easily be viewed as a tacit admission that they waited too long to get started.
- Sticking the landing on rate policy is important to the Fed, but so is controlling the narrative and maintaining the central bank’s credibility. With that in mind, there’s nothing in the August inflation report that’s likely to sway policymakers from the measured quarter-percent cut that they’ve been guiding expectations toward for some time.
The bottom line?
- Consumer inflation continues to trend gradually back toward a range that’s more palatable to both policymakers and consumers.
- The door has been firmly opened to lower interest rates, starting with next week’s Fed announcement that appears to be virtually locked in at a quarter point.
- It’ll be the FOMC’s updated projection materials — providing greater insight into the likely future path of interest rates — that could be the real market mover, particularly if the recent progress on inflation and weakness in labor data prompts the Fed to adopt a more aggressive path to rate normalization than was outlined in the central bank’s June projections.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
