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US Inflation at 8.3% in August, Fed Likely to Retain Hawkish Bias

US Inflation at 8.3% in August, Fed Likely to Retain Hawkish Bias

Diego Colman, Strategist

AUGUST INFLATION KEY POINTS:

  • August U.S. inflation rises 0.1% month-over-month, prompting the annual rate to ease to 8.3%, from 8.5% in July
  • Core CPI advances 0.6% on a seasonally adjusted basis and 6.3% year-over-year, two tenth of a percent above estimates
  • Inflationary forces are not weakening at the desirable pace despite the ongoing economic slowdown, strengthening the case for higher-for-longer interest rates

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Most Read: How Will Multi-Decade High Inflation Will Impact U.S. Midterm Elections?

Updated at 9:00 am ET

MARKET REACTION

Immediately after the CPI report crossed the wires, U.S. Treasury yields jumped across the curve on speculation that the Fed will stick to its aggressive hiking plans and keep monetary policy restrictive for longer-than-expected or at least until inflation shows compelling signs of easing.

The move in bond rates sparked a solid rally in the U.S. dollar (DXY) as traders bet yield-differentials will continue to be a tailwind for the foreseeable future. Meanwhile, stocks took a sharp turn to the downside, erasing pre-market gains across the board, with S&P 500 and Nasdaq 100 futures plunging 2.15% and 2.8% respectively at the time of this writing.

Looking ahead, financial conditions are likely to start tightening again, after easing somewhat in recent days in the wake of the huge stock market rally. This situation will fuel volatility, creating a negative bias for U.S. equities.

US YIELDS, US DOLLAR AND STOCKS CHART

market reaction to inflation data

Source: TradingView

Original post 8:40 am ET

Inflationary pressures in the United States failed to cool materially and remained relentlessly high last month despite falling gas prices, a sign that the Federal Reserve has more work to do to restore price stability and bring lasting relief to U.S. households, whose budgets have been squeezed by the cost-of-living spike that has taken place for much of the first half of the year.

According to the U.S. Bureau of Labor Statistics, the consumer price index, which measures how much Americans pay for a representative basket of goods and services, rose 0.1% on a seasonally adjusted basis after flatlining in July, topping consensus forecasts calling for a 0.1% slide. The monthly gain in the all-items index was partially driven by a 0.8% jump in food costs, despite the 5% drop in the energy component.

Compared to one year ago, CPI eased to 8.3% from 8.5% previously, matching April’s low. Economists surveyed by Bloomberg had expected the headline print to clock in 8.1%. While the directional improvement is welcome, it is still too slow to warrant a change in course by the Fed, a sign that the bank is likely to maintain a hawkish bias even if the restrictive stance begins to inflict more noticeable pain on the economy.

Excluding food and energy, the so-called core inflation, which reflects longer-term trends in the economy and attempts to reduce noise from the data by eliminating volatile components from the calculation, climbed 0.6% sequentially and 6.3% in annual terms, two tenth of a percent above forecasts in both cases.

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INFLATION RESULTS

Inflation data for August

Source: DailyFX Economic Calendar

Focusing on some of the monthly details of the core gauge, used car prices slipped 0.1%, extending their retrenchment after their pandemic surge. Apparel inched up 0.2% following a 0.1% drop in July, despite the high inventory-to-sales ratio that has plagued the nation's major department stores. Meanwhile, shelter soared 0.7%, offsetting declines in other categories and biasing the data to the upside.

Overall, inflationary forces are not weakening at the desirable pace despite the ongoing economic slowdown, increasing the likelihood of additional front-loaded monetary tightening and strengthening the case for higher-for-longer interest rates aimed at cooling demand in the struggle to restore price stability. Against this backdrop, the Fed is likely to raise interest rates again by 75 basis points at its September meeting, while pushing back on any speculation of a dovish pivot in 2023.

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Related: The CPI and Forex: How CPI Data Affects Currency Prices

EDUCATION TOOLS FOR TRADERS

---Written by Diego Colman, Market Strategist for DailyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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