August Consumer Price Index: +0.1% vs. -0.1% consensus and +0.0% prior.
The headline print as well as the core reading, which excludes volatile food and energy prices, came in hotter than expected both M/M and Y/Y, suggesting that "you can lock in the Fed hiking rates by three-quarters of a percentage point" at its September 20-21 meeting, Justin Wolfers, an economics professor at the University of Michigan, wrote in a Twitter post.
In turn, markets have now completely priced out the chances of a 50-basis-point rate increase for the September gathering. Traders are hedging for an 80.0% probability of a 75-bp rate hike, and a 20.0% chance that the Fed will lift its overnight lending target rate by 100bps, according to CME's FedWatch tool. The central bank's current target rate stands at 2.25%-2.50%.
"The Federal Reserve looks at the August CPI and likely remains on track for another large rate hike at the upcoming Sept. meeting," said Mark Hamrick, senior economic analyst at Bankrate. "An added consideration is the next rate hike may well not yet be the last, taking the benchmark rate farther into restrictive territory. And that, combined with continuing reductions in the Fed’s massive balance sheet, will act to further dampen economic activity and likely weaken the job market."
The disappointing inflation report put investors on edge, with all three major U.S. stock index futures getting knocked lower. Dow futures (INDU) -1.8%, S&P futures (SPX) -2.2% and Nasdaq futures (INDU) -2.8% at 9:05 a.m. ET.
A M/M slump of 10.1% in the energy commodity component of the CPI basket (gasoline, -10.6%; fuel oil, -5.9%) offset increases in food and energy services indexes. The food index rose 0.8% in August, with food at home climbing 0.7% and food away from home up 0.9%.
Y/Y, CPI: +8.3% Y/Y vs. +8.1% expected and +8.5% prior.
Core CPI: +0.6% M/M vs. 0.3% expected and +0.3% previously.
Prices for electricity, new vehicles, apparel, shelter, medical care services and transportation services all gained some steam during August. On the other hand, used cars and trucks, and the energy index contracted.
Y/Y, core CPI: +6.3% vs. +6.1% forecasted and +5.9% prior.
"The substantial decline in gasoline prices is noteworthy but doesn’t address the overall problem with inflation. The report notes that the food index has jumped 11.4% over the past year, marking the biggest 12-month increase since May 1979," Hamrick said.
Of note, August was "the largest monthly increase in owners' equivalent rent of primary residence since June 1990," in a sign that the sticky aspects of inflation aren't showing signs of slowing, Charles Schwab Chief Investment Strategist Liz Ann Sonders wrote in a Twitter post.
Previously, (Sep. 8) Chicago Fed President Charles Evans said labor market will slow down as central bank hikes rates "expeditiously."