August CPI Recap: Hot enough to nudge the Fed, but not much more

Key arguments

• Headline CPI came in as expected at 0.4% m/m, driven by higher energy prices, but core CPI was hotter than anticipated at 0.29% m/m.
• The upside surprise in core CPI was largely due to an outsized contribution from education and communication services, which pushed the supercore index to 51bps; other components were broadly in line.
• The July FOMC press conference and renewed hawkishness at Jackson Hole have put the Fed in a credibility trap, forcing a hike despite mixed inflation signals.
• Fed officials on the fence, such as Governor Waller, have placed the burden of proof on encouraging inflation prints to avoid hiking, and August CPI does not qualify as encouraging.
• The Fed is expected to deliver one or two 25bp hikes, starting next week, as a nudge rather than the beginning of a sustained tightening cycle.

Corresponding source evidence

1. Itwas not and we expect the Fed to increase its policy rate next week. · next week
2. We think anudge via ahike or two isprobably what the Fed will think isappropriate, starting with a hike next week. · next week
3. Core CPI was hotter than expected inAugust 20 21 22 23 24 25 26 -2 0 2 4 6 8 10 3m ann.