Headline CPI inflation accelerated to 3.7% in August, up from 3.2% in July, as energy prices spiked. Core inflation, excluding food and energy, moderated slightly to 4.3%. Food inflation remains elevated at 4.3% year-over-year, with egg, butter, and milk prices falling while meat and bread costs rose. Shelter inflation jumped to 7.3%, showing the lagging but persistent impact of higher housing costs. Services inflation ticked down to 5.9% but remains nearly triple the Fed's 2% target. Overall, this higher-than-expected inflation report will likely keep the Fed on track for further interest rate hikes to combat stubborn price pressures.
U.S. stocks were mixed after August CPI data met expectations. The Dow closed lower while the S&P 500 and Nasdaq ended slightly higher, buoyed by Microsoft and Amazon. Headline inflation is reinforcing hopes that the Fed is nearing the end of rate hikes. Major indices recovered from sharp losses earlier this week after Oracle's 20-year low, while Apple's price recovery is yet to be seen. Investors are awaiting the largest IPO by Arm Holdings on Thursday, valued at $54 billion.
Gold prices have been volatile lately, dropping to three-week lows after US inflation trended into reinflation, leading to uncertainty about the Fed's next moves. While the data supports the case for a Fed pause on rate hikes next week, the uptick in core inflation keeps bets alive for another hike in November, though expectations for economic weakness ahead may limit further downside for gold.
Oil prices are expected to remain high and potentially rise further through the end of 2023 due to ongoing tight supply, with global demand still projected to grow. However, high inflation and potential economic slowdowns, especially in major consumers like the US and China, pose downside risks to oil demand. Upside price risks include geopolitics and the prospect of record-low inventories, while rising interest rates and a stronger dollar could limit gains.
Asian currencies remained rangebound as markets expected the Fed to keep rates steady, though China's yuan found support from the PBOC while the Singapore dollar rose on steady unemployment. Argentina's peso continues to weaken amid 124.4% inflation, the highest since 1991, as the new president advocates for a transition to the USD. Though the US dollar edged lower post-inflation data, Fed rate hikes are seen to limit major recoveries for regional currencies.