The US Bureau of Labor Statistics data showed that the headline inflation rate in the United States was 0.2% on a monthly basis in August, the same as July and analysts’ estimates.
Annual inflation slowed sharply from 2.9% to 2.5%, slower than market expectations of 2.7%. In fact, 2.5% is the slowest rate since March 2021!
Core CPI (MoM): 0.2% (0.2% expected and prior)
Core CPI (YoY): 2.5% (2.7% expected, 2.9% prior)
Core CPI (MoM): 0.3% (0.3% expected, 0.2% prior)
Core CPI (YoY): 3.2% (3.2% expected, 3.2% prior)
But before you say “cool inflation means more rate cuts,” you should know that the monthly core reading rose from 0.2% to 0.3% as shelter costs rose 0.5% while airfares and vehicle insurance also saw notable increases.
Link to the US CPI for August 2024
Market Reactions
US Dollar vs Major Currencies: 5 minutes
US Dollar Overlay Against Major Currencies Chart by TradingView
The US dollar, which saw downward pressure during the Asian session, continued its recovery during the day and jumped to much higher levels upon the release of the report.
But the dollar quickly retreated, and it looked as if it spent the rest of the day trading in a risk-friendly trading environment.
As we can see, the stronger-than-expected core CPI reading has dampened calls for a 50bp rate cut by the Fed this month. Instead, markets are expecting a 25bp rate cut in September and another 25bp cut in November.
the CME FedWatch Tool The central bank now sees an 86.0% chance of a 25 basis point rate cut in September, up from 66.0% before the report. The odds of a 25 basis point rate cut in November also rose to 48.2% from 27.4% after the CPI report.
The Fed’s lack of need to resort to aggressive interest rate cuts has calmed investors who were concerned that major central banks would need to resort to extreme measures to keep their economies afloat.
The US dollar spent the rest of the trading session higher against safe havens such as the Swiss franc and Japanese yen but lower against “risk” currencies such as the euro, British pound, Australian dollar, New Zealand dollar and Canadian dollar.