Macro Consensus Challenger: CPI Tilts Risk of 50bp September Fed Cut Above 50%

Summary

• August CPI roughly aligned with expectations.
• Core goods and supercore services were mixed, with some items seeing falling inflation and some rising inflation.
• OER inflation accelerated but this is more likely noise than signal as the residential market remains weak.
• Against a backdrop of stable inflation trends and stable long-term inflation expectations, a 50bp cut at next week’s FOMC is now my low conviction call. It would be accompanied by one more cut both in 2025 and 2026.

Market Implications

• I now expect three Fed cuts in 2025. I see a greater than but near 50% chance of a 50bp cut next week, against markets pricing only about 10%.

CPI Roughly Aligned With Expectations

August CPI roughly aligned with expectations and Sam’s model that predicted the surprise in MoM headline (table 1).

Relative to July, core MoM was marginally higher largely due to used cars and OER inflation (Table 2).

Table 1: August CPI Roughly Aligned With Expectations

Table 2: Marginally Higher August Core MoM CPI

Core Goods Inflation: Mixed Bag

Excluding used cars, core goods inflation was unchanged from July (Table 3, Chart 1). The details were mixed. The prices of goods with the highest import penetration such as consumer electronics, household furnishings and apparel moved in opposite directions. Consumer electronics and households’ furnishings saw lower inflation than in July, but apparel inflation increased. New car prices inflation accelerated.

Used car prices inflation accelerated to 1.04%, compared with 0.48% in July but July-August follows two months of deflation (Chart 2). The index is roughly back to its level of March 2025. Also, the ratio of used to new car prices has remained stable though at a higher level than pre-pandemic. The past two months price increases could therefore reflect this new long-term trend rather than short-term demand pressures.

While the Fed relies on core inflation as an indicator of trend, it targets headline inflation. Food prices have been on an upward trend since the pandemic (Chart 3). Also, the downtrend in total energy prices is seemingly consolidating.

The average effective tariff rate (AET) has settled around 10% of imports over June-August, well below 17%, the AET based on the Trump administration’s announcements (Chart 4). It is unclear whether this reflects implementation lags or the granting of various exemptions. If the latter, this could reflect voters unhappiness at the higher tariffs and inflation and the 10% AET could therefore stay in place until the November 2026 mid-terms.

Table 3: Used Cars Drive Core Goods Prices Higher

Chart 1: Mixed Core Goods Prices	Chart 2: Used Car Prices Up
Chart 3: Higher Food and Energy Prices	Chart 4: Tariffs Have Stabilised

OER Higher Inflation More Noise Than Signal

OER inflation accelerated to 38bp from 28bp in July (Chart 5). However, the series is noisy and rising vacancies and falling market rent inflation suggest the disinflation trend will likely resume (Chart 6).

Chart 5: OER Inflation Rose MoM	Chart 6: OER Disinflation to Resume

Supercore Inflation Slows

Supercore services inflation slowed to 33bp from 48bp in July (Table 4, Chart 7). Like core goods inflation, it was a mixed bag. The slowdown was largely driven by medical care, which accounts for about one fourth of the supercore weights and is largely driven by insurers reimbursement rates rather than by short-term demand pressures (Chart 8).

Inflation in other categories was mixed. Lodging away from home (mainly hotels) increased by 2.3% but this follows five months of outright deflation. August’s price level was still below May’s. Transportation inflation rose but recreation and education and communications inflation fell.

Table 4: Slower Supercore Inflation (MoM %)

Chart 7: Slower Supercore Inflation	Chart 8: Lower Medical Care Costs

Market Consequences

In my Fed preview, I argued downside risks to employment and upside risks to inflation are greater now than a year ago when the Fed cut 50bp (Table 5). Ahead of yesterday’s CPI, I saw risk of a 50bp cut at next week’s FOMC near but below 50%, and above market pricing of about a 10% risk.

Yesterday’s print aligned with expectations and did not show a clear pattern of broadening of tariff-induced inflation. Inflation trends remain broadly unchanged (Charts 9-10).

Also, the Fed is relying on core PCE as its signal for inflation trends. Based on PPI and CPI, Viresh estimates that August core PCE will print 24bp MoM (i.e., 3% YoY, which compares with 2.9% in July and with the SEP Q4 average of 3.1%. However, market-based core PCE, a better measure of underlying trends because it excludes input prices such as portfolio management fees, would increase by 21bp in August, which would translate into 2.6% YoY, similar to July.

Against a backdrop of stable long-term inflation expectations, I think yesterday’s CPI provides cover for the Fed to cut 50bp next week, which is now my call but with low conviction (i.e., risk above but near 50% compared with markets pricing only a 10% risk).

A 50bp cut by the Fed would imply the FOMC has reassessed employment risks upwards, and inflation risks downwards. In turn, this would suggest the dot plot will show one more cut in 2025 and 2026, i.e., three 2025 cuts and two 2026 cuts against two and one, respectively, in June’s dot plot.

Table 5: Stronger Employment Risks Than a Year Ago When Fed Cut 50bp

Chart 9: Roughly Stable Inflation Trends	Chart 10: Stable Alternative Inflation Indices

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of Macro Hive. This includes providing or reproducing this information, in whole or in part, as a prompt.)