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• US inflation for August rose 2.5% year-on-year, in line with the market estimate.
• The US dollar posts gains against the major currencies today.
• Market odds of a 25 basis-point cut this month increase to 85%.

US Inflation Continues to Decline
 

The US Consumer Price Index (CPI) continues its downward path. The August CPI report eased to 2.5% year-on-year, down considerably from the 2.9% gain in July and in line with the market estimate. Notably, CPI has slowed for a fifth straight month, as elevated interest rates have brought inflation down closer to the Fed’s target of 2%. Inflation is currently at its lowest level since February 2021, during the economic downturn caused by the Covid pandemic.

On a monthly basis, CPI rose by 0.2%, in August, in line with the market estimate and unchanged from July. Shelter costs rose in July compared to a June while energy prices were sharply lower.

Core CPI, which excludes food and energy and is considered a better gauge of inflation trends, was unchanged at 3.2% y/y, matching the market estimate. Monthly, core CPI rose 0.3%, above the July gain of 0.2% and the market estimate of 0.2%.

Expectations Rise for a Fed Cut of 25 Basis Points
 

Today’s CPI report is the final inflation release before next week’s Federal Reserve meeting. The Fed is virtually certain to deliver a milestone rate cut, but by how much? The Fed has been striving for a soft landing for the US economy and would prefer a modest rate cut of 25 basis points. However, fears that the US labor market is faltering led to a global market meltdown in July and put pressure on the Fed to hike by an oversized 50 basis points.

The rate cut odds have been moving wildly and the likelihood of a 50-basis point cut surged to 59% last week after Friday’s lukewarm nonfarm payrolls of 142 thousand. The odds for a 50bps cut were at 27% prior to the inflation release and have dropped to 15% following the release, putting the likelihood of a 25-bps cut at 85%, according to the CME’s FedWatch tool.

Traders should be prepared for further shifts in the rate cut odds, with the release of two key releases, the producer price index and retail sales, ahead of the Fed meeting.

US Dollar Rises, Stock Market Down After CPI Report
 

Today’s headline and core CPI readings matched the market estimate, and the US dollar has posted moderate gains the major currencies. The USD/JPY currency pair showed the most movement, rising 0.39% following the inflation report.

The US stock market opened a short time ago and is in negative territory.

The Nasdaq 100 Index is down 49 points (0.26%) at 18,780 points.

The S&P 500 Index is down 33 points (0.60%) at 5462 points.

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