Core Inflation Exceeds Expectations, Reducing Probability of 50bps Rate Cut

Unexpected Increase in Core CPI

After last month's slight miss in the Consumer Price Index (CPI), which led to speculation about a 50 basis points cut, further fueled by the jobs report miss and a significant downward revision, the Bureau of Labor Statistics (BLS) has revealed that the CPI came in higher than anticipated at the core level. This increase was predicted by only a few Wall Street strategists. The core CPI rose by 0.3% month-on-month (MoM) against a forecast of a 0.2% increase. All other metrics were in line with expectations:

• CPI: 0.2% MoM (or 0.187% unrounded), Expected: 0.2% - in line
• CPI Core: 0.3% MoM (or 0.281% unrounded), Expected: 0.2% - higher than expected
• CPI: 2.5% Year-on-Year (YoY), Expected: 2.5% - in line
• CPI Core: 3.2% YoY, Expected: 3.2% - in line

Visual Representation of the CPI Increase

Here's a visual representation of the headline print, where the annual CPI increase fell to just 2.5% from 2.9%, the lowest since February 2021. The core CPI, on the other hand, shows that goods deflation is slowing down and may even turn positive in the coming months, while core service inflation continues to be the main driver. This marks the 51st consecutive month of MoM increases in Core CPI, a new record high.

Underlying Factors

Looking at the details, used car prices fell by 1.0%, a moderation from last month's 2.3% drop. Airline fares, however, jumped by 3.9%, a significant reversal from last month's unusual 1.2% drop. Car insurance costs increased by another 0.6% after a 1.2% rise, while furniture prices fell by 0.3%, reversing last month's 0.3% increase.

Bottom Line

The unexpected increase in core inflation has certainly added a new twist to the economic narrative. It has reduced the odds of a 50 basis points rate cut, which was being speculated due to last month's CPI miss. This development underscores the unpredictability of economic indicators and their potential impact on fiscal policies. What are your thoughts on this unexpected increase in core inflation? Feel free to share this article with your friends and discuss. Also, remember to sign up for the Daily Briefing, which is delivered every day at 6pm.