U.S. August CPI Reveals: Core Inflation Resilience Remains Strong, Probability of Significant Rate Cuts Decreases

The U.S. August CPI rose by 2.5% year-over-year, lower than the expected 2.6% and July's 2.9%, marking the lowest level since March 2021. However, the core CPI increased by 3.2% year-over-year, in line with expectations and previous values, the lowest since May 2021. Notably, the core CPI increased by 0.3% month-over-month, slightly higher than the expected 0.2%.

In the detailed CPI data, food prices remained flat month-over-month, energy prices decreased by 0.8%, and core goods prices slightly increased. Core service prices rose by 0.4% month-over-month, with the residential component increasing by 0.5%, rising for two consecutive months and higher than the 12-month average of 0.4%. The "super core inflation," which excludes food, energy, and housing, increased by 0.03% month-over-month, marking the first non-negative growth in the past four months.

According to the latest estimates, the U.S. CPI and core CPI for September are expected to be 2.4% and 3.2% respectively, and by the end of the year, they will be around 2.4% and 3.0% respectively. This suggests that inflation rates in the fourth quarter will remain relatively stable, with the possibility of rebounds in individual months, and the overall pace of inflation decline is expected to be slow.

Following the release of the CPI data, market expectations for a 50 basis point rate cut by the Federal Reserve in September have dropped from over 30% to less than 20%, while the expectation for at least a 100 basis point cut within the year remains unchanged. However, the probability of a 125 basis point cut has dropped from 60% to less than 30%.

The current market expectation for rate cuts remains high, mainly due to lingering concerns about economic recession. If subsequent economic data prove that recession fears are unfounded, rate cut expectations may be further adjusted downward. We believe that a rate cut of 75 or 100 basis points within the year is reasonable, depending on future economic data, and the expectation for a 125 basis point cut may gradually fade.

The August CPI data for the U.S. reveal the resilience of inflation, especially in residential prices. This may affect the Federal Reserve's monetary policy decisions, leading to adjustments in market expectations for rate cuts. Investors should closely monitor future economic data and policy movements of the Federal Reserve to better understand the trends in inflation and interest rates.