Small Aug CPI rise seen sealing 25 bp cut next week

(Reuters) -U.S. consumer prices rose marginally in August, but underlying inflation showed some stickiness, which could discourage the Federal Reserve from delivering a half-point interest rate cut next week.

The consumer price index increased 0.2% last month after climbing 0.2% in July, the Labor Department said on Wednesday. In the 12 months through August, the CPI advanced 2.5%. That was the smallest year-on-year rise since February 2021 and followed a 2.9% increase in July.

Economists polled by Reuters had forecast the CPI gaining 0.2% and rising 2.6% year-on-year. Though inflation remains above the U.S. central bank's 2% target, it has slowed considerably.

MARKET REACTION:

STOCKS: U.S. stock index futures extended a slight loss to 0.35% pointing to a soft open on Wall Street BONDS: The 10-year U.S. Treasury yield rose to 3.676% and the two-year yield rose to 3.677%FOREX: The dollar index turned 0.11% higher and the euro turned down 0.09%

COMMENTS:

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN

“The slightly warmer core inflation reading means a 50 bps point cut is unlikely. The Fed may start rate cuts a lot like how they started the hikes: 25 bps at first and then have the option to upsize the cuts as necessary. A lot of people are worried about the optics if the Fed cuts by more than 25 bps, but they seem to forget that there’s a policy statement and press conference associated with every meeting. It’s not just the action that matters. It’s the messaging that matters even more.”

BEN VASKE, SENIOR INVESTMENT STRATEGIST, ORION, OMAHA, NEBRASKA

“CPI coming in below expectation this morning reiterated the Fed’s stance that the economy is due for rate cuts. The Fed’s focus turning toward employment rather than inflation at this point seems warranted, as recent labor reports have come in weaker than anticipated and have been coupled with downward revisions to prior reports. We are still fully anticipating a 25-basis point cut a week from now, and markets will have to grapple with the benefits of lower rates versus the signaling that the economy is weakening.”

CHRIS LARKIN, MANAGING DIRECTOR, TRADING AND INVESTING, E*TRADE FROM MORGAN STANLEY, NEW YORK

“The Fed is widely expected to cut rates by 0.25% next week, and today’s more-or-less on-target CPI reading keeps that very much in play. That may disappoint those investors hoping for a bigger cut, but with inflation seemingly under control, the markets will likely turn their focus back to the economic growth side of the equation—especially the employment picture.”

JASON PRIDE, CHIEF OF INVESTMENT STRATEGY AND RESEARCH, GLENMEDE, PHILADELPHIA

"It's a continuation of the moderation in inflation. The core number is a little bit ahead of expectations on a monthly basis, but the year-over-year number is effectively in line and the headline number, year over year is a little bit light."

"It's a mixed bag, I suspect the Federal Reserve would have liked to have seen softer numbers in order to justify a potential 50 bps cut at the upcoming meeting. We would still say that there is a chance they will consider 50 basis points at this meeting, but this probably makes it more likely that they proceed with a 25 basis rate cut."

MICHAEL LORIZIO, SENIOR FIXED INCOME TRADER, MANULIFE INVESTMENT MANAGEMENT, BOSTON

"(The market has) repriced some of the immediate expectations for rate cuts down a little bit lower… we're seeing that move closer to 25 basis points expected for cuts at the September meeting, and perhaps some lower amount for the rest of the year than previously stated. But overall I don't know if it's going to change a tremendous amount for the Fed, other than just to kind of solidify that 25 is probably the appropriate vote.”

MONA MAHAJAN, SENIOR INVESTMENT STRATEGIST AT EDWARD JONES, NEW YORK

"Generally the inflation numbers were in line with expectations which was nice to see with both headline and core CPI to some extent moving in the right direction. Headline CPI at 2.5% is getting more meaningfully closer to the Fed's 2% target. That was primarily driven by lower energy prices and that should continue this month given what we've seen with WTI."

"On the core side we did see some positive trends in both new and used vehicles, especially on a year over year basis, but we are still seeing some elevated levels in shelter and rent pricing as well as sticky motor vehicle insurance pricing, which has been much higher than folks had anticipated. We would expect over time that both of those components continue to moderate."

"Generally the takeaway for markets is we're moving in the right direction. This should support the Fed starting its rate cutting cycle next week. They have already indicated that they're much more comfortable with inflation moderating. They're now watching the other side of its dual mandate, which is the labor market."

BEN MCMILLAN, PRINCIPAL AND CHIEF INVESTMENT OFFICER, IDX INSIGHTS, TAMPA, FLORIDA

“This really kind of came in dead on expectations. Even looking under the hood at the individual components, they weren't really any big surprises. The immediate take away is that this dramatically reduces the likelihood of a 50-bps rate cut in September next week. And I think that's why you're seeing the futures sell off a little bit. That wasn’t unexpected because I thought the market was pretty aggressive at pricing in a 50-basis point rate cut in September anyway. This reaffirms what the Fed is really focused on - the jobs numbers. This makes the jobs numbers, and the revisions to those numbers, even more important.”

CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NORTH CAROLINA (EMAILED NOTE)

"All clear for launch – the Fed has the green light to cut 25 bps next week, given that the inflation report was in line with expectations. It’s possible that some will be disappointed that there wasn’t a lower-than-expected inflation reading, which might have given the Fed more room to cut 50 bps, but most of the Fed speakers have already telegraphed their desire to start slowly and not begin with a jumbo cut."

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“The report basically confirms that core inflation remains in the pipeline. It probably seals a quarter percentage point rate cut from the Fed.”

“Headline inflation was actually low, especially year-over-year, and it’s headed in the right direction, approaching the Fed’s 2% target.”

“I don’t know if it’s a blip, but this report shows core inflation is still a question mark. And that will probably motivate the Fed to lower rates by 25 basis points.”

WASIF LATIF, PRESIDENT AND CHIEF INVESTMENT OFFICER, SARMAYA PARTNERS, PRINCETON, NEW JERSEY

“That's a clear green light for the Fed to proceed. The market reaction is probably reflecting that. The Fed was looking for that clear signal. And so, this to me would be a much stronger all clear signal to proceed with the rate cut that they need. The 25 bps cut was baked in. Maybe this increases the probability of 50 basis point cut.”

(Compiled by the Global Finance & Markets Breaking News team)