The Headline Numbers
Consumer price index (CPI) rose 0.4% month over month, matching forecasts. Year-over-year headline inflation held at 3.4%, unchanged from the prior month and in line with expectations.
Core CPI, which strips out food and energy, rose 0.3% - a tenth higher than expected. Year over year, core came in at 2.4%, a tenth lower than the prior month and in line with expectations. That 2.4% is the lowest core reading in five years.
Energy Led the Rise
Energy again drove the report. The broad energy index rose 2.1% in August. Energy commodities rose 4.2%. Gasoline jumped 3.9% (near 4%), which made up more than a third of the overall monthly increase. Fuel oil rose 10.1%.
Even with these higher energy prices, the year-over-year numbers stayed flat.
On the downside within the report: energy services fell, electricity dropped 0.2%, and medical care commodities fell 0.2%.
Why the Fed Is Likely to Hold
Despite a report we expected to be dominated by energy, inflation did not really move higher. My read: the Fed holds rates next week.
Raising rates 25 or even 50 basis points would not end the geopolitical supply shock. Higher rates cannot produce another barrel of oil or refine another gallon of gas. Since the core number did not go up - and hit its lowest in a while - there is no reason to move. If core CPI had risen, I would have changed my view. It did not, so I am staying with a hold call.
Some traders expect a tough time for Fed policy and possible dissent among members next week, but the majority view is likely to be "let it run a little bit longer." The Fed chair does not want to raise rates over higher gas prices, since rates have nothing to do with that. The real concerns are housing, which is in bad shape, the consumer, and small business. Expect some dissenters, but a hold is the base case. It will get bumpy.
Market Reaction
The 10-year Treasury yield sat at 4.92%, unchanged to slightly higher. Stock futures were slightly higher, driven more by crude oil falling about 3.25% than by the CPI print.
The CME FedWatch tool showed little change from the prior day, with odds still near 70% for a rate hike. That could shift through the day as the numbers get digested.
The Oil Picture
Crude oil sits near $90 to $100. On a two-week chart it was $80 two weeks ago, so it is still up 25%. That is the shock hitting the economy. Demand is picking up, with China starting to buy barrels of oil again. This is a very critical time, but for now inflation at the core level is at its lowest in five years.
