The inflation report dashes hopes of a jumbo rate cut next week

But the core CPI reading, which excludes volatile food and energy costs, rose unexpectedly to 0.3%, from 0.2% the previous month, driven by higher housing costs.

The new data will factor into the Federal Open Market Committee’s interest-rate decision next week, with the hot core figure decreasing the odds of a jumbo 50-basis-point cut.

The CME FedWatch tool — which calculates the market’s probabilities for rate cuts of specific sizes — is now assigning just a 15% likelihood to a bigger move, down from where it was after the August jobs report.

“Wednesday’s CPI came in as expected giving the Federal Reserve the go ahead to still cut interest rates at the September meeting, albeit by a more shallow 25 basis points,” Skyler Weinand, the chief investment officer of Regan Capital, said in commentary. “The Fed wants to finally initiate a rate cutting cycle to get in front of increasing unemployment levels and in order to calm fears that the Fed may already be behind the curve.”

The consumer price index increased 0.2% over the month from July to August, the same rise as the consensus expectation of 0.2% and the previous month-over-month increase of 0.2%.

Core CPI increased 3.2% over the year from August 2023 to this past August, matching the forecast of 3.2%, and it was the same rate as in July.

Housing costs continue to be a big factor in overall inflation. Shelter accelerated ever so slightly, rising 5.2% year over year in August, greater than July’s 5.1% increase. Shelter rose 0.5% from July to August, following the previous 0.4% month-over-month gain.

Gas and other energy prices have tumbled recently. The energy index fell 4% year over year in August, compared with a 1.1% rise in July. The index fell 0.8% month over month in August after no change in July.

Grocery costs, which have especially hit consumers in their wallets, have begun to level off. The food index rose 0.1% month over month in August after rising by 0.2% in June and July. More specifically, the food-at-home index didn’t change over the month after rising 0.1% in July. Food away from home rose slightly faster than previously — with a 0.3% increase in August compared with a 0.2% increase in July.

The food index also increased 2.1% from August 2023 to this past August after increasing 2.2% in July.

Softening but still relatively strong labor-market data will also weigh on the Fed’s decision. Data from the Bureau of Labor Statistics out on Friday showed unemployment dropped from 4.3% in July to 4.2% in August, and monthly job growth has cooled during the summer.

“The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market,” Federal Reserve Chair Jerome Powell said at a July press conference following the FOMC policy interest-rate decision. “If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.”

Powell also said during that conference: “We will be data-dependent but not data-point-dependent, so it will not be a question of responding specifically to one or two data releases.”