U.S. Core Inflation Spike in Aug. 2024 Adds Pressure Ahead of Fed Rate Decision
NAIROBI (CoinChapter.com)— U.S. core inflation rose more than anticipated in Aug. 2024, intensifying speculation about the Federal Reserve’s upcoming interest rate decision.
Data released by the Bureau of Labor Statistics showed the Core Consumer Price Index (CPI) increased by 0.3% month-over-month (MoM), higher than the 0.2% forecast by economists. Year-over-year (YoY), core inflation stood at 3.2%, driven largely by a 5.2% rise in shelter costs.
US CPI 12-month % change. Source: Bureau of Labor Statistics
The headline CPI, which measures the overall inflation rate, remained in line with expectations. It rose 0.2% month over month and 2.5% year over year. The U.S. core inflation figure, however, underscores concerns about underlying price pressures despite the easing of broader inflation.
Market Reaction and Fed Rate Expectations
Following the CPI data, Bitcoin (BTC) experienced a sharp decline, falling from $57,000 to $56,168. Major cryptocurrencies like Ethereum (ETH) and Solana (SOL) saw similar drops of 2.1% and 4.6%, respectively.
Fed target rate probabilities. Source: CME Group
The U.S. Federal Reserve is widely expected to cut interest rates by 25 basis points (bps) in its upcoming meeting. Data from CME FedWatch indicates an 83% probability of such a move.
Capital Economics’ Paul Ashworth highlighted that while the 3.2% YoY core inflation figure appeared concerning, the more modest three-month annualized core CPI of 2.1% suggests that the inflation is stabilizing.
Market expectations on Fed’s rate decision post-CPI data. Source: The Kobeissi Letter
However, the likelihood of a larger 50 basis point (bps) rate cut has sharply diminished following the release of the latest CPI data. According to The Kobeissi Letter, the odds of such a cut fell from 34% to just 8%, making a 25 bps cut the likelier scenario.
A 25 bps cut could relieve some pressure from the stock and crypto markets but may not deliver a major boost. A more aggressive 50 bps cut would have raised concerns about the Fed’s confidence in the economy, potentially unsettling markets even more.
The U.S. core inflation figures reinforce the challenge faced by the Fed as it seeks to balance inflation control with maintaining economic growth. Although headline inflation is easing, persistent price pressures in housing and other core sectors complicate the central bank’s decision-making process.
The Fed will meet next week to determine the size of the rate cut, and markets will be watching closely for signals on the direction of U.S. monetary policy.
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