Inflation Comes in Under Expectations at 2.5%

The Consumer Price Index increased month over month in August by 0.2% on a seasonally adjusted basis, meeting the median forecast collected by Dow Jones.

However, non-seasonally adjusted year-over-year inflation was 2.5% rather than the expected 2.6% — a positive surprise. The Bureau of Labor Statistics said this was the smallest 12-month increase since February 2021.

Core inflation, which excludes energy and food, rose 0.3% in August versus a projected 0.2%. Year-over-year core inflation was 3.2%, which was expected. The energy index was down by 4.0% while food increased by 2.1%.

From a commercial real estate view, shelter, which has continued to be a major contributor to inflation, was up by 0.5% in August. That’s the highest number since the 0.6% in January. On a seasonally unadjusted basis, shelter costs for consumers grew by 5.2%. Only transportation services grew faster at 7.9%, but shelter represents about a third of CPI prices and so has an outsized weight on the calculations.

Shelter is largely split between rent (up 0.4% from July to August) and homeowners’ equivalent rent (up 0.5%). Lodging away from home grew 1.8% between months. While progress continues in lowering inflation, the ongoing higher shelter inflation rates could drive more political and social opinion to rein in multifamily rents.

The combination of good (overall) and disappointing (core) news clears the Fed to cut rates next week but probably limits how large this first reduction will be.

“The road to normal inflation hit a bump in August as lingering pressures for housing and service costs once again cropped up,” wrote Nationwide Senior Economist Ben Ayers in an emailed note. The hotter core CPI growth, a reversal after some months of cooler readings, should lock in a 25-basis-point rate cut next week “as Fed officials remain wary to feed any lingering price momentum for the economy.”

Ayers also mentioned that their own “supercore” measure of core services less rents was still up 0.3% from July to August and 4.5% year over year. “This suggests that there is still more work to be done on the inflation fight and may keep the Fed from easing as much as the market expected over the rest of 2024,” he wrote.

Gargi Chaudhuri, Chief Investment and Portfolio Strategist, Americas at BlackRock, agreed in prepared emailed remarks that “the slight stickiness in services inflation supports only a 0.25% cut at the Federal Reserve meeting next week” because the Fed is shifting its primary focus from inflation to the labor market.

“Going forward, the risks are clearly weighted toward slowing growth and a deteriorating labor market, and that’s why there are still four 25 bps cuts priced in with only three meetings left in the year (i.e. implying at least one of the three meetings would have a 50 bps cut), but if the economy continues to slow – and not drop into an abrupt recession – the Fed will be able to cut at a measured, 25 bps-per-meeting pace,” wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.