Inflation in August declined to its lowest level since February 2021, according to a Labor Department report released yesterday that also showed core inflation – a key measure – was higher than expected, setting the stage for an expected quarter percentage point rate cut from the Federal Reserve.
The August 2024 Consumer Price Index (CPI), a broad measure of goods and services costs, rose by 0.2% month-over-month, in line with the Dow Jones consensus, and cooled to 2.5% year-over-year from 2.9% in July – its lowest level in 3½ years.
However, core CPI, which excludes food and energy prices, rose 0.3% for the month, slightly higher than the 0.2% estimate. The 12-month core inflation rate held at 3.2%, in line with the forecast.
While the report showed that inflation slowly continued to moderate, housing-related costs remain an issue. The shelter component for the CPI, which has about a one-third weighting in the index, climbed 0.5%, accounting for about 70% of the core increase. The shelter index was up 5.2% year over year.
Food prices rose just 0.1% while energy costs slid 0.8%.
Stock slumped following the report, while Treasury yields were mixed. However, the market rebounded later in the day, recouping its losses as the major averages all turned positive.
In the Fed futures market, traders priced in an 85% chance that the Federal Open Market Committee will approve a quarter percentage point, or 25 basis point, interest rate reduction when its meeting concludes on September 18, according to the CME Group’s FedWatch measure. A month ago, markets were learning towards a 50 basis point cut.
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Regardless of what the Federal Reserve Policy Setting Committee decides when its meeting concludes next week, markets already are pricing in lower rates. Treasury yields, particularly at the 2- and 10-year duration, are at their lowest levels in more than a year. In addition, a recession indicator known as an inverted yield curve recently reversed, a move that often portends both rate cuts from the Fed as well as a slowdown in the economy.
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