Inflation Down to 8.3% in August, But 3rd 75 BPS Hike Still Likely

Inflation in the U.S. eased to 8.3% in August, according to the latest consumer price index (CPI) release. While a downwards move was largely expected by analysts, most of them believe the Fed will still impose a third consecutive 75 basis points (bps) interest rate hike.

Consumer Prices Eased in August, In Line With Expectations

The latest consumer price index (CPI) print showed that inflation slipped to 8.3% last month, according to data by the U.S. Bureau of Labor Statistics. The print exceeds the Wall Street expectations of around 8% on an annual basis.

Month-over-month, inflation increased by 0.1%, while analysts were projecting a 0.1% drop. In July, inflation fell to 8.5% year-over-year and remained flat on a monthly basis.

Core inflation, which does not factor in volatile gas and food prices, came in at 6.3%, compared to analysts’ expectations of +0.3% on a monthly basis. Year-over-year, core inflation rose by 6.3% in August, while analysts were forecasting a 6% jump.

Markets moved ahead of the new CPI print, with S&P futures and Nasdaq contracts rising over 0.3% and 0.5%, respectively. On the other hand, the Bloomberg dollar spot index slipped 0.3% before the release.

The drop in the Bloomberg dollar index marks a third consecutive day of declines and its longest losing streak in a month. In contrast, the U.S. Treasuries moved higher ahead of the release, which could be an important factor for the Federal Reserve’s interest rate hike decision next week.

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Fed 90% Likely to Introduce Another 75 BPS Hike This Month

All eyes are now on the Fed’s meeting next week. While a slight drop in CPI was already expected, most of Wall Street believes the U.S. central bank will remain aggressive in its fight against inflation and impose a third consecutive 75 bps interest rate increase.

Strategists at Wall Street giants including Goldman Sachs and Bank of America are among those who expect the Fed to continue hiking interest rates at the same pace as in the previous two months, compared to previous forecasts of a 50 bps increase. Based on Fed’s Chairman Jerome Powell’s comments at the Cato Institute’s 40th Annual Monetary Conference last week, markets were pricing a more than 90% chance of a third 75 bps increase, said Bank of America analysts.

“In our view, unchanged guidance about when the pace of rate hikes may slow suggests that Chair Powell and the Fed are comfortable with current market pricing.”

– Michael Gapen, Chief U.S. Economist at the Bank of America

Do you see the Fed following through with a 75 BPS interest rate hike? Let us know in the comments below.