Instant Insights: All clear for rate cuts? | Insight Investment

Consumer prices rose 0.2% in August, taking headline CPI from 2.9% to 2.5%, the closest it has been to the Fed’s target since February 2021. Core prices rose 0.3%, keeping Core CPI at 3.2% on a year-on-year basis. Although core inflation continues to be somewhat stubborn, we believe this report will support the Fed’s decision to kick off its interest rate cutting cycle next week.

Energy and core goods continue to drive disinflationary trends

Energy prices fell -0.8% in August, with declines in gasoline and natural gas prices key contributors. Core goods prices also retreated 0.2%. Moderating global shipping prices in recent weeks appeared to help ease pressure on goods prices.

Figure 1: Energy and core goods categories continue to drive disinflation¹

The “stickier” core services categories nonetheless remain somewhat elevated.

Shelter inflation (the largest CPI category by weight) rose 5.2% in August from a year earlier, a slight pickup from 5.1% growth rate seen in the prior month. Excluding shelter, CPI was 1.1% year-on-year, the lowest since July 2023. We expect shelter to continue to make slow progress but to keep trending in the right direction as the measure tends to lag private rental market indices.

Elsewhere, “supercore” services (which exclude shelter), remained at 4.5% year-on-year, with notable strength in airline fares. However, the wider transportation and medical services segments continued to ease (Figure 2).

Figure 2: Shelter remains sticky, rising year-on-year²

Markets appear confident that inflation is sustainably moving to 2%

Inflation “breakevens” now reflect market expectations of sub-2% inflation over the next 5-years. Longer-term pricing (out to 30-years) is trending at 2%, indicating that markets view the Fed’s progress on inflation as sustainable.  

Figure 3: Markets appear confident that the Fed is bringing inflation sustainably to target³

All clear for the fed to cut rates?

Although core CPI remains a tad too high, the clear disinflationary momentum is an encouraging sign, with core prices running at 2.1% and 2.7% on a 3-month and 6-month annualized basis, respectively.

We believe the stage is set for the Fed to kick off its rate cutting cycle next week. Our base case remains for a 25bp cut. The FOMC will also deliver a revised “dot plot” and quarterly economic projections, which we will watch closely for signs of the likely trajectory of cutting cycle over the coming years.