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US CPI rose more than expected in August, but markets are convinced the Fed will not raise rates.

By Daniela Hathorn

14:35, 13 September 2023

US CPI rose 0.6% in August in line with analyst estimates. Markets were anticipating a yearly change of 3.6%, but the actual figure has come in higher at 3.7%. Core CPI, which had been the main cause of concern at the end of last year and had managed to rise less than expected in July, has followed headline inflation higher, rising 0.3% in August, as analysts estimated the figure to remain unchanged at 0.2%.

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Energy prices have picked up once again, led higher mostly by oil, which will be rebalancing the base effects after the continued drop in the latter part of 2022. This is the reason why headline inflation is rising faster than core inflation, which excludes energy and food prices. But the rise in core inflation renews concerns about a resurgence in domestic price pressures, which will keep the Federal Reserve on a hawkish monetary policy track. 

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Prior to the data release, market-implied pricing was suggesting a 93% chance of no rate hike at the Fed’s meeting next week, on Wednesday, September 20. As it currently stands, these probabilities have shifted to a 95% chance of no hike, despite the data coming in higher than expected. So, it seems like it’s going to take a lot more than just one data point to convince markets that the Fed needs to hike again in September. In fact, most of the focus is on what will happen at the meeting in November, with markets now split on whether another hike will be needed then.

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The initial reaction in the market has been subdued. The dollar hasn’t managed to find enough support to push higher towards the 105 level as clearly evidenced by market-implied probabilities, traders still believe the Fed will keep rates on hold next week. This means the positive surprise in the CPI data has failed to lift the dollar higher. The stock market continues to try and find its footing but hasn’t evidenced a significant selloff after the release. 

It's likely that markets will remain sensitive to any developments over the coming days that could impact the rate decision next week.

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