While much of the focus was on the US CPI report yesterday, the weekly initial jobless claims arguably stood out more. The headline figure was the highest since October 2021 and provides further evidence of a weakening labour market. At the balance, traders are working with that to push the Fed narrative as the inflation numbers were not exactly too worrisome – at least for now again.
Headline monthly inflation came in at +0.4% m/m while core monthly inflation was at +0.3% m/m. The latter is a bit borderline though, with the unrounded figure being +0.346%. So, one can argue that it was a close shave to have not seen a stronger number there.
As much as they are within expectations, these figures are still running well above the supposed +0.17% m/m run rate needed for annual inflation to ease towards the Fed’s 2% target. And with tariffs passthrough set to continue to have some impact in the months ahead, we are likely due more stubborn price pressures at least until the turn of the year.
Looking at the report yesterday, the details showed that headline inflation was largely driven by an acceleration in energy (+0.7%) and food (+0.5%) prices. Meanwhile, a surge in prices for airfares (+5.9%) was what drove core prices much higher with used vehicles prices (+1.0%) also contributing to that. One of the most price sensitive categories to tariffs, being apparel, also showed a marked jump in prices of +0.5% in August.
So, there is certainly some evidence of tariffs passthrough. However, it’s not enough just yet to scare markets especially with the idea that the jobs market is weakening at this pace. A possible line of thinking is that slower jobs and a slowing economy will eventually lead to more depressed prices, counteracting tariffs inflation – which most seem to be arguing will be temporary anyway.
As such, traders are now pricing in ~71 bps of rate cuts by year-end. That’s a slight step up from around ~67 bps before we got the mix of US data above. As for a 50 bps rate cut next week, that seems to be off the table but traders are certainly more convinced now that the Fed has to move in consecutive meetings to round off the year from hereon.