August CPI Surge Stuns Economists: Rate Hike Ahead Or Just A Blip?

The August Consumer Price Index (CPI) report showed that consumer inflation increased by slightly more than expected during the month.

Headline consumer inflation rose to 3.7% on a year-over-year basis, up from July’s 3.2% increase. This was driven by a 0.6% rise in headline consumer prices in August that in turn was mainly due to rising energy costs during the month.

Core inflation, which excludes energy and food, came in as expected, down from 4.7% to 4.3% year-on-year. However, on a monthly basis, core inflation accelerated at a 0.3% pace, ticking up from both the prior and expected 0.2% increase.

The report sparked mixed reactions from economists, and is likely to maintain heightened uncertainty among market players regarding the trajectory of interest rates.

Chart: August CPI Inflation Rate (YoY & MoM % change)

August’s Hot CPI Report Divides Economists

Jeffrey Roach, chief economist at LPL Financial, said that the rise in headline inflation is temporary and will not likely be a main factor next month. The economist points to the fact that prices for hotels, used vehicles and recreation all declined in August, indicating a slowdown in overall consumption activity.

Roach emphasizes that shelter costs remain a persistent component of inflation and predicts that core inflation will decelerate as rent prices slow down.

According to Sam Millette, fixed income strategist for Commonwealth Financial Network, the increase in headline inflation is of greater concern, as it may portend a more long-lasting inflationary trend. The expert attributes this rise partially to increased energy costs during the month and the largest monthly rise in headline consumer prices in a year.

Millette said there is still more work to be done to get to the Fed’s 2% target. Despite this, the higher-than-expected consumer inflation is not likely to lead to a rate hike at the upcoming Fed meeting.

Nathaniel Casey, investment strategist at Evelyn Partners, emphasizes the role of energy prices in driving up the August inflation rate, with the inflation rate for the sector accelerating to 5.6%. He mentions the surge in crude oil prices as a significant contributor to the increase.

Casey suggests the Federal Open Market Committee (FOMC) may resist hiking rates in the coming meeting due to reassuring data on easing inflation and softening labor market conditions. As the U.S. economy continues to grow, however, the FOMC is likely to show persistence in keeping the current interest rates for the foreseeable future.

Alex McGrath, chief investment officer for NorthEnd Private Wealth, notes the CPI exceeded economists’ expectations but points out that it aligns with expectations given the rapid rise in energy and commodities over the past three months.

He predicts that if the CPI remains elevated in September and October, another rate hike from the Federal Reserve could be on the table. McGrath anticipates increased market volatility as risk-on assets may appear expensive in the face of elevated yields.

Chief Investment Officer at Independent Advisor Alliance, Chris Zaccarelli, describes Wednesday’s report as a disappointment, particularly due to the unexpected 0.3% monthly increase in core inflation. However, he notes that the likelihood of the Fed staying on hold for the current month remains high.

Zaccarelli cautions that the increase in inflation leaves the door open for a Fed rate hike before year-end, potentially impacting market dynamics. He concludes that stock market rallies are possible if the economy remains resilient and inflation doesn’t reignite.

At the time of this writing, the stock market was trading slightly higher, with the SPDR S&P 500 ETF Trust SPY up 0.2%.

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