The US inflation rate in August reached its lowest annual rate since February 2021, coming in at 2.5%. This marked a decline from July’s 2.9% and fell below the anticipated 2.6%. While this cooling of inflation is positive news, the underlying picture is more complex.
Excluding volatile food and energy prices, core inflation remained stubbornly high at 3.2%. This persistence is largely due to a surge in shelter costs, which saw their fastest monthly increase since January 2024. The sticky core inflation, particularly in services, continues to be a key concern for the Federal Reserve.
The mixed inflation report and the ongoing pressure of core inflation have prompted a shift in expectations regarding the Federal Reserve’s upcoming September meeting. Initial predictions leaned heavily towards a substantial 50-basis-point rate cut, but these have now dwindled to a mere 15%, down from 34% the day before. The market is now more inclined towards a smaller, 25-basis-point reduction.
On the brighter side, energy goods and services indices saw significant monthly decreases, contributing to the overall easing of price pressures. Gasoline prices dropped 0.6% month-over-month in August after holding steady in July. Electricity prices also declined by 0.7%, and utility bills for piped gas services fell by 1.9%.
These mixed signals have had a ripple effect on the markets. The S&P 500 opened Wednesday’s session slightly lower by 0.2%, while tech stocks remained flat. Small caps experienced a more significant drop, falling by 1%. Among the S&P 500 sectors, Technology Select Sector SPDR Fund XLK performed the best, rising 0.5%, whereas the Real Estate Select Sector SPDR Fund XLRE saw the biggest decline at 1.6%. The Invesco DB USD Index Bullish Fund ETF UUP gained 0.1%, while the i Shares 20+ Year Treasury Bond ETF TLT eased 0.1% as Treasury yields rose. Gold prices dropped by 0.4% and Bitcoin experienced a 2% decline.
The persistence of core inflation remains a key factor that will influence the Federal Reserve’s actions. As the economic landscape evolves, investors and markets will closely watch for further clues about the direction of interest rates and the overall health of the US economy.
