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Expert reaction to US august inflation data
Economy
On Friday, Wall Street focused on the August consumer inflation report, which showed an acceleration in monthly price pressures.
This prompted traders to raise their expectations for a Federal Reserve rate hike next week.
According to the US Bureau of Labor Statistics, the headline and core Consumer Price Index (CPI) rose by 0.4% and 0.3% month-over-month in August, respectively, whereas consensus forecasts had predicted increases of 0.4% and 0.2%. Both figures accelerated compared to the July readings of 0.1% and 0.2%.
On a year-over-year basis, the headline CPI rose by 3.4% in August—unchanged from July—while core CPI slowed to 2.4% from 2.5%. Both figures matched consensus forecasts.
Released the day after largely "hawkish" Producer Price Index (PPI) data, the CPI report further reinforced the likelihood that the Federal Open Market Committee (FOMC) would raise the benchmark interest rate by 25 basis points on September 16.
According to the CME FedWatch tool, the probability of a quarter-point rate hike surged to nearly 87% following the release of the inflation data, up from approximately 69% prior to the announcement.
Although the PPI and CPI are closely monitored, the FOMC uses the Personal Consumption Expenditures (PCE) index as its preferred inflation gauge. Components of the PPI and CPI are factored into the PCE calculation; the PCE has remained above the Fed's long-term 2% target for 65 consecutive months. Short-term U.S. Treasury yields showed the strongest reaction to the CPI data: the 2-year yield, which is sensitive to rate changes, rose 6.3 basis points to 4.613%. Wall Street generally took the data in stride, finding encouragement instead in the drop in oil prices.
Some popular exchange-traded funds (ETFs) that track the underlying S&P 500 index include the SPDR S&P 500 ETF Trust, Vanguard S&P 500 ETF, and iShares Core S&P 500 ETF.
Below are various reactions to the CPI data:
Kevin Gordon, Head of Macro Research and Strategy at the Schwab Center for Financial Research:
"This report did absolutely nothing to help the proponents of a dovish policy. Core CPI came in high, and the breadth of rising components aligns perfectly with the issue Chairman (Kevin) Warsh highlighted in his Jackson Hole speech. Core services inflation has accelerated over the past few months, while core goods continue to offer no relief.
When considering the primary drivers of inflation—tariffs, energy, and AI-related capital investment—none have shown significant signs of slowing. All of this creates major hurdles for returning inflation to the 2% target, implying that the Fed looks increasingly compelled to raise rates.
The reality is this: non-farm payroll growth is solid, nominal GDP is accelerating at an annualized rate of 6.6%, and inflation remains persistent. The arguments against a rate hike are weakening by the day."
Justin Wolfers, Professor of Public Policy and Economics at the University of Michigan:
"The Fed pays closer attention to core inflation, which excludes food and—especially—energy (hello, Iran!). Even by this measure, inflation remains elevated. And the 0.3% rise this month was higher than most expected."
Bill Adams, Chief U.S. Economist at Fifth Third Commercial Bank:
"This week’s spike in energy prices overshadows the August inflation reports. Yesterday, diesel prices at U.S. pumps topped $6 a gallon, setting a new record, and have risen 63% over the past 12 months. While consumers feel the impact of rising gasoline prices directly when driving, core inflation is more vulnerable to diesel price shocks because businesses rely on diesel to fuel their fleets.
For the Fed, the rapid rise in energy prices in early September will likely tip the scales in favor of a rate hike at next week’s meeting.
In a speech at the Fed’s monetary policy conference in Jackson Hole in late August, Governor Warsh stated: 'We must be confident that core inflation is moving toward our objective—clearly and with sufficient speed. Otherwise, we have more work to do.' Overall, the energy price spike and the August inflation reports likely leave FOMC members less confident that inflation is moving toward the target than they were when Governor Warsh spoke."
Jeffrey Roach, Chief Economist at LPL Financial:
"Markets expect the Fed to raise rates by 25 basis points next week, though the impact may prove limited." An increasing share of economic activity is less sensitive to interest rates—much like what was observed during the 2022–2023 rate-hiking cycle.
As investment in AI grows and affluent consumers and Baby Boomers continue spending on travel, demand may remain resilient despite policy tightening. Consequently, nominal economic growth will stay above 6% over the coming quarters, supporting corporate revenues.”
Samuel Tombs, Chief US Economist at Pantheon Macroeconomics:
“Following the CPI release, we anticipate a 0.28% rise in the core PCE deflator (based on the new methodology), translating to an annualized rate of 3.4%. This is slightly higher than the 3.3% core PCE inflation rate seen in July—a figure we estimate will be revised down to 3.0% once the new methodology is implemented. Viewed through this narrow lens, disinflation has stalled, and a rate hike in September now appears highly likely.”
Joseph Brusuelas, Chief Economist at RSM US:
“After a brief slowdown in June and July, inflation accelerated again in August, setting the stage for a likely interest rate hike by the Federal Reserve at its September policy meeting. Energy, transportation, and services prices led the gains; each of these components is likely to continue rising—sharply in some cases—driven by a surge in oil and distillate prices that will ultimately feed into higher food costs.
We expect the Fed to raise rates by 25 basis points at the meeting, followed by at least two more hikes over the coming year to steer inflation back onto a credible path toward the central bank’s 2% target.” "While we believe the decision is not a foregone conclusion given the price dynamics in the August report, the Fed needs to raise rates to preserve its credibility."
Heather Long, Chief Economist at Navy Federal:
"A Fed rate hike in September is now all but certain... It is the right decision. The risks of inflation remaining entrenched (or continuing to broaden) are rising. Chairman Warsh does not want to repeat Powell's mistake of waiting too long to raise rates.
My focus is on middle- and low-income Americans. I believe a rate hike could help them by: a) curbing inflation and b) potentially LOWERING borrowing costs, as bond investors gain confidence that the Fed has the situation under control."