The US consumer price index (CPI) rose 2.9% in August, up from 2.7% in both June and July and matching the market estimate. Monthly, CPI rose 0.4% in August, up from 0.2% in July and above the market estimate of 0.3%. This was the highest monthly and annual inflation rate since January. The acceleration was driven by an increase in gasoline, housing and food prices.
Core CPI, which excludes food and energy and is considered a better gauge of inflation trends, was unchanged from July, with readings of 0.3% month-on-month and 3.1% year-on-year.
As Trump’s tariffs continue to make their way through the economy, they are expected to boost inflation and dampen growth. With inflation moving higher and employers cutting back on hiring, there is a greater risk of stagflation.
Friday’s employment report indicated that the economy added just 22 thousand jobs in August, following the small gain of 79 thousand in July. There was further soft employment news today, as unemployment claims jumped to 263 thousand, up from 236 thousand and above the market estimate of 235 thousand.
Fed Widely Expected to Lower Rates at September Meeting
Today’s inflation report hasn’t moved the needle on market rate expectations, as the markets have fully priced in a rate cut at next week’s Federal Reserve meeting. Investors have priced in a 90% likelihood of a quarter-point rate cut, with a 10% chance of a jumbo half-point cut.
It is very unlikely that the Fed will chop off a half-point after staying on the sidelines since December 2024. Such a drastic move could have a detrimental effect on investor confidence, as it would indicate that the Fed believes that the US economy is in deep trouble and requires shock therapy in the form of an oversized rate cut.
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US Dollar Edges Lower, Stock Market Higher after Inflation Report
The US dollar is slightly lower against most of the major currencies following the release of the US inflation report. The GBP/USD currency pair has gained about 0.20% since the inflation report and AUD/USD has climbed about 0.30%.
The US stock market has posted gains in early trading on Thursday, as investors have reacted positively to the inflation report.
The S&P 500 Index has climbed 23 points (0.35%) and is trading at 6,555 points.
The Nasdaq 100 Index is up 74 points (0.31%) at 23,923 points.