Consumer-level inflation in August -- at least as measured by the Bureau of Labor Statistics -- printed a bit hotter than expected -- and showed some worrying signs of consumer-level inflation broadening further.
The headline August consumer price index printed at 0.1% month-over-month and 8.3% year-over-year.
Ouch.
But that's not the whole story. While the year-over-year print was down from July's 8.3%, both of these numbers were above consensus, even with the benefit of gasoline prices that dropped 10.6% month-over-
month and fuel oil prices that decreased 5.9% month-over-month. The lower oil and gasoline prices were somewhat offset by a 3.5% month-over-month increase in prices for piped gas service. This did not portend well for the core rate.
At the core, outside of food & energy, August's CPI hit the tape at 0.6% month-over-month, up from 0.3% in July, and up 6.3% year-over-year, which was up from July's 5.9% and was the highest year-over-year print since the month this series last peaked in March 2022. August was the second-straight month that prices for both shelter and medical care services grew above trend after these two categories had lagged for a number of months.
The very thought that consumer-level inflation might still be broadening to parts of the
economy that had not been hit quite as hard is troubling.
Financial markets had obviously priced in a cooler report than was released. It is early, but I see all of the major equity indexes off between 2.5% and 3.5%. Treasury debt securities sold off sharply as well. I see U.S. 2-Year paper paying as much as 3.75% and the 10-Year yielding 3.43%. Oil, gold, silver and Bitcoin are all trading lower.
Futures trading in Chicago are now pricing in an 82% probability for a three-quarter percentage point rate hike at next week's Federal Open Market Committee policy meeting with an 18% chance of a full percentage point increase. That would take the Fed Funds Rate from a range of 2.25% - 2.5% up to a range of 3% to 3.25%. These same markets are now pricing in a 59% likelihood for another three-quarter percentage point increase on Nov. 2 and a year-end Fed Funds Rate of 4% to 4.25%. Futures markets are now also pricing in a
cycle high FFR of 4.25% to 4.5% in March 2023.
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