Unexpected rebound in US core CPI in August, Fed's rate cut probability almost "zero"

According to the Zhitong Finance APP, the US Bureau of Labor Statistics released data showing that in August, the US CPI rose by 2.5% year-on-year, falling for the fifth consecutive month, in line with market expectations and lower than the previous value of 2.9%; the month-on-month CPI in August rose by 0.2%, in line with market expectations and the previous value. The US Bureau of Labor Statistics stated that housing is a "major factor" in overall economic growth.

Due to the rise in housing and travel prices, the unexpected increase in basic inflation in the US in August weakened the possibility of a significant interest rate cut by the Federal Reserve next week.

The market noted that the core CPI in the US rose by 0.3% month-on-month in August, estimated at 0.2%, with the previous value also at 0.2%. Economists believe that the core inflation rate can better reflect underlying inflation compared to the overall CPI. The core CPI in August rose by 3.2% year-on-year, in line with the estimate and the previous value of 3.2%.

Institutional analysis believes that the higher-than-expected US core inflation data will be a question mark for the Federal Reserve to cut interest rates by 50 basis points next Wednesday. The current focus is on the core CPI monthly data, which tends to increase concerns about stubborn inflation. Those FOMC members who are concerned about a too rapid or too aggressive shift in monetary policy will definitely oppose a 50 basis point rate cut next week.

Although Wednesday's data will not prevent the Federal Reserve from cutting interest rates next week, it reduces the likelihood of a significant rate cut. Nevertheless, policymakers have made it clear that they are highly concerned about the weakness in the labor market, which is more likely to drive policy discussions and decisions in the coming months. They will also have more data to consider before the November and December meetings.

Neil Birrell, Chief Investment Officer at Premier Miton Investors, commented on the US CPI report, stating that the possibility of a 50 basis point rate cut by the Federal Reserve next week "has been dealt a significant blow by this figure, but it is not enough to prevent the Fed from cutting rates."

Traders have lowered the probability of the Federal Reserve cutting interest rates by half a percentage point next week to near zero. US Treasury yields rose, S&P 500 index futures edged lower, and the US dollar reduced its intraday decline, causing the USD/JPY to rise from 141.80 to 142.35.

Housing Remains the Main Driver of Inflation

In addition to housing, airfares, clothing, and childcare and preschool education have also driven prices higher. Car insurance costs and hotel accommodation fees continue to rise.

Housing prices, the largest category in the service sector, rose by 0.5%, marking the largest increase so far this year. This is the second consecutive month of increase, breaking economists' widespread expectations of a slowdown. Owner's equivalent rent (a subset of housing and the largest single component in the CPI) also rose at a similar pace.

Excluding housing and energy, service prices rose by 0.3%, the largest increase since April. Although Federal Reserve officials emphasize the importance of this indicator when assessing the country's inflation trajectory, they calculate based on separate indices The inflation measure favored by the Federal Reserve, the Personal Consumption Expenditures Price Index (PCE), does not emphasize housing weights like the Consumer Price Index, which is why it is getting closer to the Fed's 2% target.

The Personal Consumption Expenditures (PCE) index, to be released later this month, references certain categories from the Consumer Price Index and the Producer Price Index. The Producer Price Index report released on Thursday is expected to show moderate wholesale inflation