The U.S. inflation continued to ease in August, as reported by the Bureau of Labor Statistics on September 11. The Consumer Price Index (CPI) increased by 2.5% year-on-year (previously 2.9%), with a monthly increase of 0.2% (unchanged from 0.2% in July). The core CPI, which excludes food and energy, remained steady with an annual increase of 3.2% (same as the previous 3.2%), and a monthly increase of 0.3% (up from 0.2%).

Breaking down the data, the decline in the annual CPI growth rate was largely driven by a reduction in energy prices, benefiting from last year’s high base effect. Energy prices fell 4% year-on-year (previously up 1.1%). However, core CPI, excluding food and energy, remained unchanged, primarily due to a rebound in housing services prices. The annual growth rate of housing services prices increased to 5.2% in August (up from 5.1%), with a monthly increase of 0.5% (up from 0.4%).

Housing prices have consistently been the largest impediment to the decline in core CPI. However, due to the recent slower pace of reduction, the market now anticipates an 85% probability of a 25-basis-point rate cut in September (up from 66% prior to the release of the CPI data). Moreover, the market expects a total of four rate cuts throughout 2024, with one in September, two in November, and one in December.

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The Federal Reserve released the minutes of the July FOMC meeting on August 21, providing insight into the views of Fed officials on the current economic conditions and outlook:

Inflation: Inflation has eased compared to a year ago, with core PCE rising 2.6% year-over-year in June. Although still above the Fed’s 2% target, recent data have given Fed officials confidence that inflation is on track to reach the target, supported by factors such as slowing economic growth, weakened pricing power among businesses, and reduced household savings. Many officials noted that as the labor market rebalances, wage growth has continued to slow, which should further translate into a decline in core non-housing services inflation. Some officials also noted that the decline in new tenant rents is likely to have a delayed impact on housing services inflation, leading to the continuous moderation of housing services inflation

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Employment: The labor market is currently strong but not overheating. While the unemployment rate has been rising slightly since April, it remains at historically low levels. Some officials believe that job growth may be overestimated, as several officials pointed out that various indicators suggest the labor market is continuing to slow, with declines in hiring rates and job openings. Others also indicated that the rebalancing of the labor market has been partly supported by an increase in labor supply, particularly due to rising labor force participation rates among those aged 25 to 54 and an increase in immigration.

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Policy Outlook: With inflation continuing to decline, most officials believe that if inflation continues to fall as expected, it would be reasonable to consider easing monetary policy at the next meeting. Many officials see increasing risks to the employment target, warning that if the labor market slows further, it could lead to more significant deterioration. All officials agreed on the necessity of rebalancing and closely monitoring the risks associated with the dual mandate of price stability and maximum employment.

Overall, with inflation steadily decreasing and potential risks of labor market deterioration, the Fed has signaled a leaning toward a rate cut in September. Additionally, the U.S. Bureau of Labor Statistics on August 21 revised down the nonfarm payrolls by 818,000 from April 2023 to March 2024, meaning that the average monthly nonfarm payroll increase for this period will be revised down from 242,000 to 174,000, confirming the possibility that employment growth had been overstated. The market currently expects a total of 100 basis points in rate cuts throughout 2024 (25 basis points in September, 50 basis points in November, and 25 basis points in December).

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(Photo Credit: Federal Reserve)

The U.S. Bureau of Labor Statistics released the CPI data on August 14th, showing a year-over-year increase of 2.9% in July, slightly below the data in the previous month and market expectations of 3.0%. The core CPI, which excludes food and energy, rose by 3.2% year-over-year, down from 3.3% in the previous month. Both figures represent the smallest increases since 2021.

Breaking down the details, the primary contributor to the overall increase was inflation in housing services, which saw a monthly gain of 0.4%, up from 0.2% in the previous month, accounting for 90% of the total monthly increase across all items. However, this gain was offset by declines in several areas, including used cars and healthcare.

Similar to the PPI data released yesterday, the CPI data further confirms that inflationary pressures are continuing to ease. If the initial jobless claims over the next few weeks, as well as the unemployment rate and non-farm payroll data to be released on September 6th, remain stable, and if retail sales maintain moderate growth, the Federal Reserve will have more flexibility in its monetary policy decisions. Currently, the market anticipates a 64% probability of a 25 basis point rate cut at the September FOMC meeting, compared to a 36% probability of a 50 basis point cut.

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