August Inflation Report Sends Mixed Signals on Fed Rate Hikes

The August inflation report showed core prices rising by 0.2% in August, well below the expected 0.3%, and the annual core rate of 3.0% was also lower than forecasted at 3.3%. This has led to a decrease in the odds of an October rate hike from the Federal Reserve's preferred inflation gauge, the personal consumption expenditures (PCE) price index.

The CME FedWatch odds fell to 34.9%, down from 70.9% one week earlier. The change in how the government measures several service prices also contributed to the lower inflation numbers. Investment advice, legal services, and computer software prices are now estimated using a new method that goes back to January 2021.

Stephen Brown, an economist, noted that core price pressures are slightly less firm than feared. However, some experts still believe that the Federal Reserve may hike rates in October due to strong economic data, including second-quarter GDP growth being revised upward to 2.2% and ADP private payrolls rising by 90,000 in September.

The next Fed meeting is on October 27-28, and a better payroll number could raise hike odds. Rate-sensitive stocks, such as homebuilders and real estate investment trusts, may remain under pressure until the bond market agrees with the PCE report.