Underlying inflation rose as expected in August, keeping the Federal Reserve on track to cut interest rates next week.
Even though the overall CPI rose more than expected and is the largest monthly gain since the start of the year, the core CPI—ex food and energy—met expectations.
The report suggests inflation continues to linger and is expected to continue to linger for the remaining of the year, the markets are looking past the data suggesting that real Fed Funds are in restrictive territory and is beginning to impact employment levels.
The FOMC has stated it is primarily focusing on jobs to make monetary policy decisions. Weekly unemployment claims—which are notoriously volatile—rose the most last week in four years. The data is clearly skewed and is impacted by the Labor Day Holiday, the four-week moving average, a metric that helps smooth out volatility, rose to the highest level since June.
Last week’s monthly employment report indicated that companies are neither hiring nor firing given the massive uncertainty that is present in many aspects of the economy and global order.
Speaking of which, government firings are not accelerating as projected—Federal jobs are only down 97,000 since their peak in January…an insignificant number of a 2.93 million workforce. Analysts had predicted over 500,000 job losses by September.
Ands then there are tariffs. The CPI data clearly suggests that at this juncture tariffs are not having a significant inflationary impact. Corporations and countries across the distribution chain are absorbing the increased costs to maintain or gain market share. The question is how long can this last??
Owners Equivalent Rent (OER)—what you can rent your house for if it is indeed rental and is the largest component of the inflationary indices—is still rising. The 0.4% jump was the most since the start of the year.
The Federal Reserve has constantly misjudged OER believing several years ago that it was going to remain “well anchored.” It did not. The Committee forecasted OER was going to decline in 2025. For what it is worth department, the FOMC also projected tariffs are to be inflationary and to date they largely are not.
The Federal Reserve had projected a declining OER rate would offset the rising impact of tariffs.
Perhaps a larger question is at hand is why has the Federal Reserve consistently misjudged the direction of the economy/inflation given the legions of PhD’s and complicated econometric models?
Maybe of even more significant why is the Federal Reserve still regarded as both omnipotent and omniscient? The answer may be from the ability of the Central Bank to directly influence the short-term interest rates via the Fed Funds target rate.
Markets treated the data kindly, sending both equity and Treasury prices moderately higher.
Last night the foreign markets were mixed. London was up 0.38%, Paris down 0.48%, and Frankfurt down 0.19%. China was down 0.12%, Japan up 0.89% and Hang Seng up 1.16%.
Futures are flat with the narrative now asking if the markets have gone to far to fast on perhaps overly optimistic monetary policy assumptions and geopolitical risks. The 10-year is off 6/32 to yield 4.05%.
