August core CPI exceeded expectations, and the Fed’s dream of a sharp interest rate cut was shattered

The CPI data released on Wednesday showed that the annual rate of the unadjusted CPI in the United States in August was 2.5%, lower than the expected 2.6% and the previous value of 2.90%, which was the fifth consecutive month of decline and the lowest level since February 2021. The monthly rate of the unadjusted CPI in August was 0.2%, the same as expected and the previous value.

The annual rate of the unadjusted core CPI in August was 3.2%, the same as expected and the previous value, after falling for four consecutive months. The monthly rate of the core CPI was 0.3%, higher than the expected and previous value of 0.20%.

Traders cut their bets on the Fed's interest rate cuts, expecting the Fed to cut interest rates by 25 basis points next week and a total of 100 basis points this year.

After the data was released, spot gold fell in the short term and fell below $2,510. The US dollar index rose in the short term, with a cumulative increase of more than 30 points, and non-US currencies fell across the board.

Bitget data showed that Bitcoin briefly fell back to $56,265 before rebounding.

According to institutional analysis, higher-than-expected U.S. core inflation data will be a problem for the Fed's 50 basis point rate cut next Wednesday. The focus now is on the monthly rate of core inflation, which tends to increase concerns about stubborn inflation. FOMC members who are worried about monetary policy turning too fast or too decisive will certainly strongly oppose a 50 basis point rate cut next week. As expected, housing costs are the culprit. The housing index rose 0.5%, which the U.S. Bureau of Labor Statistics called "the main factor in the growth of all projects."

Steve Sosnick, chief strategist at Interactive Brokers, said that this higher-than-expected core inflation data was not what traders wanted to see. He emphasized that this was the second consecutive time that labor cost data was higher than expected, and the actual average hourly and weekly wages rose more than expected.

According to Informa Global Markets, it was the higher-than-expected monthly core inflation rate that pushed USD/JPY up from 141.80 to 142.35. The data supports a 25 basis point rate cut by the Federal Reserve next week and should rule out a larger 50 basis point cut.

Neil Birrell, chief investment officer at Premier Miton Investors, commented on the US CPI report, saying that the likelihood of a 50 basis point rate cut by the Federal Reserve next week "took a big hit from this number, but it is not enough to stop the Fed from cutting rates at all."

David Kelly of JPMorgan Asset Management said today's report was more "noise than news" because the core data this month was slightly higher than expected. He added that inflation has fallen to "room temperature", which suggests there are no "significant" inflation problems.

Shaun Osborne, strategist at Scotiabank, commented on the US CPI data, noting that the volatility between interest rates after the data release seemed "a little excessive", but it may be some kind of correction of overnight price action after the US presidential debate, when fixed income rose and the US dollar fell.

Judging from today's data, there is material for both Republican and Democratic political campaigns. Harris can argue that the big anti-inflation theme remains intact, and she has identified housing as a key area for intervention. Trump, meanwhile, can focus on core inflation data as a reminder that inflation remains above where the Fed would like it to be — and he can also highlight housing costs.

With dovish expectations already priced in, rates are “unlikely to show much appreciation from this report,” said Florian Ielpo of Lombard Odier Investment Management. “We may see a period of consolidation in real rates ahead of the Fed meeting next week. Stocks may find some confidence with expectations for a further rebound in earnings, though the decline in manufacturing selling prices should not be ignored and negative discount factor effects could weigh on stocks.”