Last updated: 08:46 EDT

Underlying US consumer inflation accelerated more than expected last month, helping ratify market expectations for at least one more move in the Federal Reserve’s tightening cycle. 

According to data published by the Bureau of Labor Statistics this morning, the headline consumer price index rose 3.7 percent in August from the same period last year, up 0.6 percent on a month-over-month basis. This was closely aligned with consensus estimates among economists polled by the major data providers ahead of the release. Energy costs jumped 5.6 percent month-over-month as global oil prices surged. 

The – arguably more important – core measure rose 0.3 percent over the prior month, breaking with the 0.2-percent prints in the prior two months, but remaining near annualised levels that are consistent with the Fed’s inflation target. On a year-over-year basis, with highly-volatile food and energy components excluded, prices rose 4.3 percent, down from 4.7 percent in the prior month. Markets were expecting a 0.2-percent month-over-month print, with annual price growth slowing to 4.3 percent. 

Equities are slipping and two-year Treasury yields are up as investors position for a hike at the central bank’s November or December meetings, and push expected rate cuts further into 2024. The dollar is pushing higher against its major counterparts. 

We think this reaction could fade relatively quickly.

Today’s number might come as a disappointment to those expecting a linear cooling in price pressures, but the so-called “supercore” measure – which captures prices in the services sector excluding housing – continued to soften, and a raft of other evidence suggests that excess demand is ebbing and disinflationary forces are growing more entrenched across the US economy. 

No one expects Jerome Powell to deliver the monetary policy equivalent of a carrier-deck “mission accomplished” speech when sequential increases in core inflation are occurring, but a pivot toward more dovish rhetoric among Federal Open Market Committee members should be evident in the coming months, freeing markets to focus on underlying growth risks – which are growing more substantial as the US consumer nears exhaustion.

Consumer Price Indices, Annual Change, %, NSA