Data from the U.S. Bureau of Labor Statistics revealed that headline inflation remained steady at 0.2% month-over-month (m/m) in August, matching both July's rate and analysts' expectations.
Annual headline inflation, however, eased significantly from 2.9% to 2.5%, below the 2.7% forecast, marking the slowest pace since March 2021.
- Headline CPI (m/m): 0.2% (in line with expectations and previous)
- Headline CPI (y/y): 2.5% (vs. 2.7% expected, 2.9% prior)
Core inflation ticked up slightly on a monthly basis, rising from 0.2% to 0.3%, driven by a 0.5% increase in shelter costs and notable gains in airline fares and motor vehicle insurance.
- Core CPI (m/m): 0.3% (as expected, up from 0.2%)
- Core CPI (y/y): 3.2% (in line with forecasts and previous)
Although cooling inflation might suggest more rate cuts on the horizon, the uptick in core inflation suggests persistent price pressures, particularly in sectors like shelter and transportation.
Market Reactions
U.S. Dollar vs. Major Currencies: 5-min
The U.S. dollar, which faced bearish pressure during the Asian session, extended its recovery and surged following the release of the U.S. inflation report. However, the Greenback soon pulled back, spending the rest of the day trading in a more risk-friendly environment.
The hotter-than-expected core CPI reading tempered expectations for a 50bps Fed rate cut in September. Markets are now pricing in a 25bps rate cut for September and another 25bps cut in November.
The CME FedWatch Tool now shows an 86.0% chance of a 25bps cut in September, up from 66.0% before the report. Odds for another 25bps cut in November also jumped from 27.4% to 48.2% after the CPI data.
This reduced the need for aggressive rate cuts, calming concerns about central banks taking extreme measures. As a result, the U.S. dollar strengthened against safe-haven currencies like CHF and JPY but weakened against “risk” currencies such as EUR, GBP, AUD, NZD, and CAD.
