The ongoing inflation battle

US inflation unexpectedly picked up in August, largely due to rising housing and travel-related costs. Housing was the biggest driver, with rent disinflation remaining stubbornly slow. Housing costs increased by 0.5%(1), the most since the start of the year, undermining what could have been a more predictable inflation report. The core Consumer Price Index (CPI), which excludes volatile food and energy prices, climbed 0.3% from July – the highest monthly gain in four months – and increased 3.2% year-over-year(1). Meanwhile, the overall CPI increased by 0.2% month-over-month and 2.5% year-over-year, its fifth consecutive month of easing thanks to falling gas prices(1). Despite rising shipping costs, core goods prices continued to decline(1), reflecting firms’ growing struggle to pass on higher input prices to consumers.

New jobs & unemployment rates

US hiring in August fell short of forecasts, with just 142,000 new jobs, while downward revisions to the previous two months left the three-month average at its lowest since mid-2020(2). This weaker-than-expected growth will likely fuel ongoing debate about how much the Federal Reserve should cut interest rates throughout the rest of the year. Despite the disappointing job gains, the unemployment rate edged down to 4.2% from 4.3%, marking the first decline in five months(2). Overall, August’s jobs report painted a mixed picture – while the slight drop in unemployment suggests improvement, downward revisions to July data and weak payrolls indicate that job creation was likely flat in July and barely positive in August(2).

Consumer sentiment 

On the consumer front, sentiment climbed to a four-month high in September, driven by the lowest short-term inflation expectations since late 2020 and hopes for lower borrowing costs(3). The University of Michigan’s sentiment index rose to 69 from August’s 67.9, preliminary data showed(3). Consumers expect prices to rise at a 2.7% annual rate over the next year, down from 2.8% in August, marking the fourth straight month of falling short-term inflation expectations, which has been a major driver of sentiment recently(3). However, despite the improvement, a record number of households remain uncertain about the economic outlook(3) with most expecting inflation to further erode their incomes, and confidence in a comfortable retirement is at its lowest in a decade(3).

Bottom line

Although August’s CPI exceeded expectations, it likely will not stop the Federal Reserve from beginning its rate-cut cycle at the upcoming September meeting. Policymakers remain focused on softness in the labor market, which is expected to play a key role in shaping decisions in the months ahead. With uncertainty still surrounding the size of the rate cut – whether 25 or 50 basis points – market volatility is expected to persist, as nearly half of traders are betting on a larger cut at the time of writing. Regardless of the outcome, the Fed faces a challenging decision as it balances inflation control with the potential impact on employment and economic growth.

(1) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
(2) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
(3) Source: University of Michigan, http://www.sca.isr.umich.edu/