US Core CPI Rises, Fed on Track for Rate Cut

Underlying U.S. inflation rose in August as expected, reinforcing the Federal Reserve’s path toward its first interest-rate cut of the year at next week’s meeting. The core consumer price index, which excludes food and energy, increased 0.3% from July, while the overall CPI advanced 0.4% — the sharpest gain since early 2025. Economists noted contributions from higher car, apparel, and appliance prices, some potentially linked to Trump’s global tariffs, though service-sector costs such as travel played the larger role. The report painted a picture of persistent inflationary pressures. Household expenses from groceries to electricity accelerated, while shelter costs climbed 0.4%, the most since January. Hotel rates surged at the fastest pace since last November, underscoring how housing and travel continue to drive overall CPI. Analysts remain divided on how much tariffs have influenced recent readings, but agree that sticky service prices are the Fed’s biggest challenge. Market Overview:

• Core CPI rose 0.3% in August, overall CPI up 0.4%, strongest since January
• Gains driven by higher auto, apparel, and appliance prices alongside travel services
• Shelter costs advanced 0.4%, led by rents and hotel stays

Key Points:

• Trump’s global tariffs contributed to select goods inflation, economists divided on impact
• Fed expected to cut rates next week, but sticky inflation may complicate further easing
• Jobless claims rose to four-year highs, highlighting labor market weakness

Looking Ahead:

• Markets expect up to three Fed rate cuts this year, starting Sept. 16-17 meeting
• PCE index — Fed’s preferred gauge — may show different trajectory given lower shelter weighting
• Persistent wage pressures and data collection gaps at BLS could shape inflation outlook

Bull Case:

• August’s inflation data, while showing persistent price pressures, arrived largely in line with forecasts, confirming the Fed’s ability to move ahead with its first rate cut without sparking market instability; equities rallied and Treasury yields fell as investors priced in greater monetary support.
• Despite sticky services inflation, the Fed is expected to deliver up to three rate cuts this year, reinforcing support for risk assets and alleviating cost pressures for households and businesses—particularly as shelter costs and travel prices moderate in coming months.
• Rising jobless claims, at a four-year high, indicate enough slack in the labor market to temper wage-driven inflation, supporting the case for accelerated easing and providing an additional buffer against runaway price increases, especially if PCE readings show less shelter inflation.
• Strategic implications: Portfolio managers and sales teams can position for cyclical outperformance in rate-sensitive sectors (real estate, consumer discretionary, growth tech), while risk departments prepare for increased short-term volatility in goods categories impacted by tariffs and supply chain disruption.

Bear Case:

• Inflation remains stubbornly above the Fed’s 2% target, with core CPI rising 0.3% and overall CPI up 0.4%—the strongest monthly pace since January—casting doubt on the sustainability of rate cuts and raising risk of policy error if the Fed acts too aggressively.
• Sticky service costs, led by shelter and travel, continue to drive headline inflation and complicate efforts to contain cost-of-living pressures; modest moderation in goods prices may be offset by Trump’s tariffs, which add unpredictability and potential global trade volatility.
• Ongoing wage pressures and gaps in BLS data collection could further skew inflation readings, making it difficult for policymakers to accurately gauge true price trends or labor market health ahead of critical rate decisions.
• Action plan for finance and compliance teams: Adopt scenario analysis for inflation persistence, maintain hedges against further price shocks, and monitor policy headlines closely—especially around tariff escalation and Fed meeting outcomes in September and year-end.

The inflation backdrop has added urgency to the Fed’s September decision, with policymakers needing to balance rate relief against lingering cost pressures. Market reaction reflected optimism: stocks opened higher and Treasuries rallied, though the dollar softened on expectations of easing. For investors, the challenge lies in deciphering how long elevated services inflation will persist — and whether the Fed can sustain rate cuts without reigniting price pressures. For the White House, Trump’s tariff policies complicate the inflation picture. While duties may have raised costs in isolated categories, they also threaten to add volatility to global trade flows just as the Fed seeks stability. That intersection of policy, politics, and inflation will define the economic narrative heading into year-end.