US inflation paints a mixed picture

Monthly headline CPI steady but housing costs drive an uptick in core inflation, reducing prospect of a 0.5% rate cut next week.

11 September 2024

Another month, another (slightly) awkward datapoint. US CPI inflation came in at 2.5% on the previous year. On the surface this represents good progress on disinflation but it is becoming clear that both core (ex food and energy) and services inflation remained firmly unvanquished, with the former coming in at 3.2% for the second month in a row. In a familiar refrain for UK consumers, car insurance in America for example remained fully 16.5% higher than a year ago, while housing costs also remained stubbornly high. The market-versus-commentator reaction to the release has been instructive. Yields across the bond market maturity spectrum are higher, with the two-year US Treasury yield (a good guide of future interest rates) up at 3.65%. But a quick and unscientific survey of the financial press in the aftermath of the release reveals an unbroken consensus that a rate cut next week is inevitable. That may be so, but it does seem at least that a full 50 basis point cut just became a little less convincing. Apart from anything else, the Fed's dual mandate means that it can't build its case for an aggressive (or indeed any) cut solely around a weakening labour market. Now a narrative will have to be crafted around why stubborn core and services numbers remain part of the plan.