The Consumer Price Index (CPI) report for August showed that inflation remains close to a four-decade high, at 8.3% year-on-year. This is slightly lower than the 8.5% rate seen in July, but still higher than the 9.1% rate recorded in June.
Rising food and housing costs are the main drivers of inflation, with food prices up 10% from a year ago and shelter costs up 6.4%. Gasoline prices have also been playing a role, although they have begun to stabilise in recent months.
Despite the high inflation rate, the CPI report was actually somewhat encouraging news for markets as it suggested that inflation may be starting to cool off from the extremely high levels seen earlier this summer. This is good news for the Fed, which has been trying to keep inflation in check without stifling economic growth.
The CPI report was just one of many data points released yesterday that showed the economy is still struggling. The other key data point was retail sales, which fell 0.3% in August, indicating that consumers are still feeling the pinch from the pandemic.
Despite the mixed data, stocks fell and Treasury yields rose after the CPI report came in higher than expected. The market is clearly worried about inflationary pressures and the potential for interest rates to rise sooner than expected. However, with the economy still fragile, it’s unlikely that the Fed will make any sudden moves on rates. For now, it looks like inflation will remain high but manageable.
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