Fed Rate Hike Tested by Trend of Energy Price Rebound

Kevin Warsh's trend test, which states that 'trends matter most', has been put to the challenge by the latest Federal Reserve rate increase. The quarter-point hike is significant, but the question on everyone's mind is what prompted this decision? According to data, August consumer inflation reached 3.4% overall, while excluding food and energy, it was a more modest 2.4%. However, energy prices have skyrocketed, with gasoline up 27.4% over the year.

The numbers paint a complex picture, but the direction of travel is telling. Monthly headline inflation accelerated to 0.4% from 0.1%, mainly due to energy price increases. In contrast, annual core CPI eased slightly from 2.5% to 2.4%. The Bureau of Labor Statistics reported that services excluding rent of shelter increased by 3.1% over the year, while all items excluding food, shelter, and energy rose by 2.0%. Both saw a 0.3% increase in August.

This indicates an energy rebound layered on top of moderating core inflation and sticky services. While this data supports caution, it doesn't necessarily justify the rate increase. The trend test will continue to be closely watched as the Federal Reserve navigates this delicate economic landscape.