Headline Inflation Eases While Core Remains Steady: Rate Cut Expectations Diminish

The US Consumer Price Index (CPI) data was released, showing a larger-than-expected decline in price pressures. The headline CPI was anticipated to fall from the previous 2.9% to 2.6%, but the actual figure came in at a 2.5% increase, marking the lowest 12-month gain since February 2021. Meanwhile, core inflation remained at 3.2% from the previous month, meeting market expectations. 

According to the report published by the US Bureau of Labor Statistics, the main driver of the overall increase across all items was the shelter index, which rose by 0.5% month-over-month and 5.2% year-over-year. Meanwhile, the energy index decreased by 0.8% on a monthly basis and 4% year-over-year, acting as a tailwind for the decline in inflation. 

The US dollar surged after the release, and precious metals faced increased selling pressure. Prior to the data, there was a 35% probability of a jumbo 50 basis point rate cut by the Federal Reserve at next week’s meeting. However, due to the report, these odds have now dropped to 13%. 

Markets hoped that the CPI data would bolster the case for a 50 basis point cut after last week’s nonfarm payrolls report, which was not convincing enough to sway the Fed. However, this report shows that inflation remains sticky, with services prices holding firm at 4.9%, and that lower energy costs primarily drive the decline in inflation. Given this, it seems unlikely that the Fed will be convinced to make a large cut, and the current scenario points to a 25 basis point reduction as the baseline expectation.