Inflation in August rose to its highest since January. Will this prevent a rate cut?

The U.S. consumer price index (CPI) rose by 2.9% year-on-year in August. This was the highest reading in almost eight months. Although traders have little doubt that the U.S. Federal Reserve will cut rates at its next meeting in September, rising prices may raise questions about how aggressively the Fed will act in the coming months, MarketWatch writes.

U.S. consumer prices (CPI) rose 2.9% year-on-year in August, up from 2.7% in July. The result matched the forecasts of economists surveyed by The Wall Street Journal. But it was the highest since January, the newspaper noted. By comparison, the Federal Reserve's inflation target is 2%.

The Core CPI, which excludes the cost of food and energy (Core CPI) remained at 3.1% annualized, the same as in July. The result was also in line with economists' forecasts in WSJ.

At the same time in the U.S. published statistics on applications for unemployment benefits, which rosesharply. For the week ended September 6, the number of applications increased by 27 thousand to 263 thousand - the maximum since October 2021, notes Reuters. Economists had expected about 235,000 applications. This was another sign of a weakening labor market, the publication adds. The figures released on Thursday follow the monthly employment report released on September 5. It showed that the U.S. created just 22,000 jobs in August, continuing a sharp slowdown in job growth in recent months, Bloomberg notes. Uncertainty surrounding President Donald Trump's economic policies has made employers more cautious about hiring in 2025, the agency adds.

U.S. futures slowed their morning gains after the release of data, Barron's reports. Contracts on the S&P 500 and technology Nasdaq 100 at the time of publication of this text added 0.1-0.2% each. The day before, both indices had updated the record. Dow Jones futures were also up 0.15% after declining a day earlier.

The yield on the 10-year Treasury bond has fallen to nearly 4%. Any drop below 3.9% would be the lowest level this year, Barron's wrote. Bond yields fall when prices rise, the publication explained.

Wholesale inflation data, as well as a broad-based revision to employment growth, reinforced expectations for a quarter-point Fed rate cut at the next meeting in September, Barron's noted.

"Demand for equities is supported by expectations of several rate cuts," said Kathleen Brooks, director of research at forex broker XTB. - "While there are concerns that stronger CPI data could derail hopes of a Fed rate cut, we think it is unlikely that there will be a major reassessment of those expectations.

After the publication of the data, traders increased their expectations that the U.S. Federal Reserve will reduce the rate at the meeting on September 16-17. Before the report, market participants had little doubt in this: the probability of a 25-basis point cut was estimated at 91.8%, but after it became even higher - 94.5%, the CME Group's FedWatch Tool shows.

It's not yet clear how long inflation will last and when price pressures will start to ease again, MarketWatch notes. Some analysts predict inflation will peak before the end of the year and then taper off. "Clearly, inflation is relatively calm, and that gives the Fed an opportunity to focus more on addressing the current weakness in the labor market," said Skyler Winand, chief investment officer at Regan Capital.

Others believe prices could accelerate in the coming months. Businesses have already used up inventories built up before Donald Trump's duties were imposed, Reuters reports. "There is compelling evidence that duty-related inflation will pick up, although it may still be a few months before the full effect manifests itself," Stephen Stanley, chief economist at Santander U.S. Capital Markets, said in a statement to the publication.

"While some had expected the duties to cause only a one-time price adjustment, the data are increasingly suggesting it could be a more protracted process with the peak still to come," Cathie Stoves, an investment manager at Mattioli Woods, added in a statement to MarketWatch.

This article was AI-translated and verified by a human editor