Rate-Hike Odds Soar Despite Lowest Core Consumer Price Inflation Since 2021
Following fuel-driven jump in Producer Prices, consensus was for a concomitant jump MoM in Consumer prices this morning, after last month's decline as energy prices have rebounded (though we warned that amid all the interventionist-y chatter, nothing would surprise us less than 'cool' print to offset the PPI scare).
And analysts were right with headline CPI rising 0.4% MoM (exactly as expected) - biggest MoM since May - but prices rose 3.5% YoY (in line with expectations and flat to the prir month)...
Core Services accelerated...
...BUT Fuel prices dominated the rise in headline CPI...
Headline CPI rose 0.4% MoM in August, after rising 0.1% in July. Over the last 12 months, the all items index increased 3.4%.
- The index for energy increased 2.1 percent over the month: The index for gasoline rose 3.9% in August, accounting for over one third of the monthly all items increase.
- The shelter index rose 0.3 percent in August after rising 0.1 percent in July.
- The index for food increased 0.1 percent over the month, as the index for food away from home increased 0.3 percent.
Just like we saw yesterday with PPI, the rebound in crude (and refined product) prices snapped CPI's Energy component notably higher...
Energy helping on a 6m annualized basis but hurting on a 3m annualized basis...
Core CPI rose 0.3% (0.29% rounded up) MoM (hotter than the 0.2% exp) but on a YoY basis it decline from 2.5% to 2.4% - the lowest since March 2021...
Core CPI rose 0.3% after increasing 0.2% in July. Core CPI rose 2.4% over the year, following a 2.5% increase over the 12 months ending July.
- Indexes that increased over the month include communication, lodging away from home, airline fares, education, and used cars and trucks.
- Conversely, the index for medical care and the index for motor vehicle insurance were among the major indexes that decreased in August.
MoM Core CPI (0.3%) Details
- The shelter index increased 0.3% over the month after rising 0.1% in July.
- The index for owners’ equivalent rent rose 0.2% in August as did the index for rent.
- The lodging away from home index rose 2.4% in August after falling 2.8 percent the previous month.
- The index for communication increased 2.3% over the month after rising 0.6% in July.
- The airline fares index rose 2.7% in August, and the education index increased 0.8%.
- The index for used cars and trucks increased 0.4% in August, and the index for new vehicles rose 0.3%
- The personal care index and the household furnishings and operations index also increased over the month.
- The medical care index decreased 0.2 percent in August after rising 0.4 percent in July.
- The index for dental services fell 0.6 percent over the month.
- The hospital services index, physicians’ services index, and prescription drugs index were all unchanged in August.
- The motor vehicle insurance index declined 0.8 percent in August after falling 0.3 percent in July.
- The index for apparel was unchanged in August as was the index for recreation.
YoY Core CPI (2.4%) Details
- The shelter index increased 3.0 percent over the last year.
- Other indexes with notable increases over the last year include airline fares (+23.4 percent), recreation (+2.7 percent), medical care (+1.6 percent), and personal care (+3.8 percent).
Shelter dropped...
Shelter Inflation rose 0.26% MoM, and up 2.75% YoY, down from 2.86% YoY in July and the lowest since March
Rent inflation rose 0.23% MoM, same as July, and up 3.04% YoY, down from 3.18% in July and the lowest since March
The much-watched SuperCore CPI (Services ex-shelter) rose notably on a YoY basis...
...with a big spike in Education & Comms costs...
Driven by a record jump in Telephone Services...
Which was all Wireless Telephone price hikes...
Here's JPMorgan with an explainer:
Education and communication goods: This category posted a near-record 1.3% rise in July, led by computer prices, as Apple repriced its Mac and iPad products.
Memory prices should continue to put upward pressure on computers and phones, which sometimes takes the form of new features being combined with price increases.
One more thing...
Bloomberg's Simon White notes that the fastest-changing input in the CPI report betrays signs that AI spending is leaking into consumer prices via the information and information processing sector.
The chart below shows the change in each CPI component’s contribution (based on its weight in the basket) to the year-on-year headline number between July and August.
The information processing sector is contributing only 0.03 percentage points to the headline rate of 3.4% at the moment, but this has risen faster than any other sector.
It includes IT hardware, where prices are starting to rise for semiconductor and memory chips, as data centers are massively fueling demand.
Apple recently announced a rise in the price of its iPhone.
If the impact from data-center spend continues, then it’s clearly an upside risk for CPI, but it should be borne in mind along with leading indicators for inflation, which are rolling over and anticipate a more subdued backdrop for price pressures over the next few months.
As an aside, real average hourly earnings growth was negative for the 5th month in a row (is it any wonder consumer confidence is low)...
On the bright-side, we are decoupling from the 19070s CPI analog...
Understandably, a lower CPI print is better for markets, and JPM's market scenario analysis affirms that:
Core MoM prints above 0.30%. SPX declines 1.5% – 2.5%; Odds 10.0%
Core MoM prints between 0.25% – 0.30%. SPX declines 25bp – 1%, Odds 25.0%
Core MoM prints between 0.20% – 0.25%. SPX gains 50bp – 1.25%, Odds 30.0%
Core MoM prints between 0.15% – 0.20%. SPX gains 1% – 1.5%, Odds 25.0%
Core MoM prints below 0.15%. SPX gains 1.5% – 2%, Odds 10.0%
For now, rate-hike odds soared to over 90%, almost certain pricing for a 25bps move higher by Warsh and his pals next week...
Rate-change expectations for 2026 has swung wildly this year from over 60bps of cuts in Feb to now 47bps of hikes (the highest of the cycle)...
Wall Street is now convinced Warsh is cornered...
Top Goldman short-term macro trader, Brian Bingham, noted that:
“The Fed is now in the most paradoxical of all positions, beholden to a single data print and potentially reactive to the rounding on the ECO screen…
Warsh told the market in his first press conference that he didn’t want to focus on the number to the right of the decimal point, but now it’s the number to the right of that one that will be the determinant. Waller’s speech on Thursday was surprisingly and overtly dovish, confirming our view that the Board skews heavily if not unanimously dovish relative to the regional presidents, but offered little new information beyond implicitly confirming a 30bp core CPI will merit a hike.
The market appears to be penciling the over/under at 25, but we struggle to see a meaningful rally on an in-line 20bp core print following this week’s jobs report; in a world where the meeting goes in pricing greater than 50% chance of a hike, the risk of the bond market interpreting a hold as a policy error seem far greater than the harm of hiking into above-target inflation.”
UBS FX team noted a somewhat muted reaction in currencies (dollar spiked then slipped lower)...
Warsh painted himself in a corner here. Well, we've gotten the hard language tough guy speech at Jackson Hole.
His remarks were prepared and his messaging was intentional.
Now, we've gotten the data - labor market print more robust, inflation still supported.
September FOMC pricing goes to just under 23bp immediately, so the market is pretty much fully expecting a hike to come.
At this point, it would be a massive blow to credibility if they fumble the football on following through with the adjustment, but the market seems to have been correct to lean into this data with a long USD gamma bias.
Interestingly, the yield curve is flattening rapidly (Fed credibility at the long-end? locked in hike will slow growth?)...
So while the world and his pet rabbit was watching for 0.2% or 0.3% - knowing energy would be a driver - it turns out it was cellphone carriers hiking prices that had forced Warsh into a corner.
Bottom line: surging cell phone prices (thanks to memory) were the deciding factor between the Core CPI printing 0.2% and 0.3%. https://t.co/KehMJOCgUj
— zerohedge (@zerohedge) September 11, 2026
The jawboning is over... it's shit or get off the pot time for Kevin (every new Fed head is tested early on by the markets).