US inflation slips to 2.5% in August

• US inflation for August rose 2.5% year-on-year, in line with the market estimate.
• The US dollar is making gains against major currencies today.
• The market’s odds of a 25 basis point cut this month increase to 85%.

The US Consumer Price Index (CPI) continues its downward trajectory. August’s CPI report fell to 2.5% on the year, down considerably from July’s 2.9% increase and in line with the market estimate. In particular, the CPI slowed for the fifth straight month as rising interest rates pushed inflation closer to the Fed’s 2% target. Inflation is currently at its lowest level since February 2021 during the economic downturn caused by the Covid pandemic.

On a monthly basis, the CPI rose 0.2% in August, in line with the market estimate and unchanged from July. Housing costs rose in July compared to June, while energy prices were significantly lower.

Core CPI, which excludes food and energy and is considered a better gauge of inflation trends, was unchanged at 3.2% y/y, according to market estimates. On a monthly basis, the core CPI rose 0.3%, above July’s increase of 0.2% and the market estimate of 0.2%.

Today’s CPI report is the last inflation report before the Federal Reserve meeting next week. The Fed is virtually certain to cut the key rate, but by how much? The Fed has been pushing for a soft landing for the US economy and would prefer a modest rate cut of 25 basis points. However, fears that the US labor market was faltering sent global markets crashing in July and pressured the Fed to hike by 50 basis points.

Rate cut odds moved wildly and the probability of a 50 basis point cut rose to 59% last week after Friday’s tepid nonfarm payrolls of 142k. Odds for a 50 bps cut were 27 percent before the inflation release and fell to 15 percent after the release, putting the probability of a 25 bps cut at 85 percent, according to CME’s FedWatch tool.

Traders should brace for further changes in rate cut odds with the release of two key releases, the producer price index and retail sales, ahead of the Fed meeting.

Today’s headline and core CPI readings matched the market’s estimate, with the US dollar posting moderate gains across major currencies. USD/JPY was the biggest mover, up 0.39% following the inflation report.

The US stock market opened a short time ago and is in negative territory.

The Nasdaq 100 index fell 49 points (0.26%) to 18,780 points.

The S&P 500 index fell 33 points (0.60%) to 5,462 points.

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