Tomorrow’s update on US consumer inflation for August isn’t expected to derail expectations that the Federal Reserve will cut interest rates next week, but the disinflation trend of late looks set to stall. The estimate is based on CapitalSpectator.com’s ensemble model for the year-over-year change in core CPI.
The core pace of CPI is projected to rise 3.2% in August, unchanged from July’s increase via the median point forecast for several models.
If correct, the unchanged trend will mark the first time since March that core CPI didn’t ease on a year-over-year basis. (Core CPI excludes food and energy prices in an effort to create a more reliable measure of the inflation trend.)
Economists overall expect a similar result, according to Econoday.com’s consensus point forecast, namely: a stable 3.2% increase in core CPI vs. the year-ago level.
An unchanged reading for core CPI isn’t necessarily a sign that disinflation has faded. Since the annual pace of core consumer inflation peaked at 6.6% in Sep. 2022, there have been three monthly instances of unchanged or firmer annual trend data. Despite these outlier events, disinflation has continued.
In theory, an unchanged core CPI reading could be an early sign that disinflation’s trend is fading, or possibly reversing. But at the moment, most analysts see the disinflation trend persisting. One reason is bound up with expectations for softer economic growth, an outlook fueled in part by a weaker-than-expected rebound in hiring in August.
“The US economy is clearly not in a recession nor is it likely to head into a recession in the home stretch of 2024,” writes Jack Kleinhenz, chief economist at the National Retail Federation, in the group’s Monthly Economic Review published last week. “Instead, it appears that the economy is on the cusp of nailing a long-awaited soft landing with a simultaneous” downshift of growth and inflation.
Softer growth expectations give the Fed room to cut interest rates, some economists reason.
“On balance, with inflation pressures subdued, there is no reason for the Fed not to err on the side of caution and frontload rate cuts,” says Seema Shah, chief global strategist at Principal Asset Management.
The concern is that while inflation is still projected to ease in the near term, a 3%-plus core inflation trend is still well above the Fed’s 2% inflation target. But recent data has convinced the central bank that softer economic activity is now the priority over taming inflation.
“The time has come for policy to adjust,” Fed Chairman Powell said at the central bank’s annual economic conference in Jackson Hole, Wyoming.