Wall Street Review CPI: Housing inflation remains strong, the rate cut in September is unlikely to be 50 basis points

The U.S. CPI in August rose by 2.5% year-on-year, in line with expectations, significantly lower than the previous value of 2.9%, marking the fifth consecutive month of slowdown and the lowest level since February 2021; however, the core CPI in August (excluding volatile food and energy costs) rose by 0.3% month-on-month, slightly higher than the expected and previous value of 0.2%, marking the largest increase in four months. Wall Street analysts generally believe that the August CPI data has solidified the Fed's decision to cut interest rates this month, but the slightly higher-than-expected increase in core inflation suggests that a significant 50 basis point rate cut in September is unlikely.

Renowned financial journalist Nick Timiraos, known as the "New Fed News Agency," wrote that the inflation data in August has paved the way for the Fed to gradually lower interest rates next week, but a significant 50 basis point rate cut is not expected.

The relatively strong housing inflation in August led to a slightly higher-than-expected increase in core prices, which may make it more difficult for Fed officials to push for a larger 50 basis point rate cut at the upcoming Fed meeting next week. However, some officials have not completely ruled out the possibility of a larger rate cut. Meanwhile, while the easing of inflation provides relief for burdened households, the labor market is cooling down, with slower hiring and wage growth, and an increase in the average duration of unemployment as finding a job becomes more challenging.

Brian Jacobsen, Chief Economist at Annex Wealth Management, also believes that a 50 basis point rate cut is unlikely.

"The slightly higher core inflation reading suggests that a 50 basis point rate cut is unlikely. The Fed may start cutting rates as they began raising them: first by 25 basis points, then selectively increasing the rate cut as needed. Many are concerned that if the Fed cuts rates by more than 25 basis points, it may not be well-received, but they seem to forget that each meeting is accompanied by a policy statement and press conference. It's not just the action that matters, but the communication is even more important."

Josh Jamner, an investment strategy analyst at ClearBridge Investments, stated that the August CPI data will disappoint short-term bond markets expecting a reduction of over 250 basis points by the end of 2025.

"Today's data is slightly unfavorable, but it won't prevent the Fed from starting to normalize monetary policy next week, but it may redefine the future rate path.

There are further signs that inflation may be more challenging than previously thought, which could lead to a slower and smaller rate cut cycle."

Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance, wrote in a report that the Fed has now been given the "green light" for a 25 basis point rate cut next week.

"Some may be disappointed that the inflation data did not fall below expectations, as this could have given the Fed more room to cut rates by 50 basis points, but most Fed officials have expressed their desire to start slowly rather than make a significant rate cut right from the start." Seema Shah of Principal Asset Management said that this is not the CPI data the market wants.

"With core inflation higher than expected, the path for the Fed to implement a 50 basis point rate cut has become more complicated. While this data will not be a barrier to next week's policy action, hawks within the committee may seize today's CPI report as evidence that the final stretch of inflation needs to be handled with caution - a strong reason for them to opt for a 25 basis point rate cut."

Ben Vaske, Senior Investment Strategist at Orion, commented:

"This morning's CPI data coming in below expectations reaffirms the Fed's stance on the need for a rate cut. The Fed's shift in focus to employment rather than inflation at this time seems reasonable, as recent labor reports have been weaker than expected, accompanied by downward revisions to previous reports. We still fully expect a 25 basis point rate cut in a week, and the market will have to weigh the benefits of lower rates against signals of economic weakness."

Chris Low of FHN Financial believes that describing today's CPI as a "bad report" is incorrect.

"While certain components did see significant increases, the most concerning - owner's equivalent rent (OER) and airfares - came after several months of good news. Meanwhile, inflation is gradually easing, as evidenced by the trend of CPI inflation year over year declining."

David Kelly, analyst at JP Morgan Asset Management, told Bloomberg that the August CPI data is more of a distraction for next week's rate decision, as core data came in slightly higher than expectations for the month. However, he added that inflation has cooled to "room temperature" - indicating there is no "significant" inflation issue.

"Overall, I think it's well controlled. It seems we haven't seen any deflation risks."