US CPI: Headline hot, core contained

What happened?

Today’s CPI release from the Bureau of Labor Statistics was broadly in line at the headline level, with somewhat softer underlying momentum. Headline CPI came in at +4.2% YoY, matching consensus expectations and accelerating from +3.8% previously, while Core CPI printed at +2.9% YoY, also in line with expectations. On a MoM basis, Headline CPI rose +0.5% as expected, while Core CPI came in softer at +0.2% relative to the +0.3% consensus estimate.

For context, this marks the highest headline CPI reading since April 2023, reflecting a reacceleration in headline inflation. However, the softer monthly core print suggests underlying price pressures remain relatively contained, with the divergence pointing to a continued energy-led inflation impulse rather than a broad-based reacceleration.

Diving deeper into today’s headline print, the primary driver was again energy, with the energy index rising +3.9% MoM and +23.5% YoY, accounting for more than 60% of the total monthly increase. Shelter inflation moderated to +0.3% MoM, while food prices rose +0.2% MoM. In aggregate, the inflation impulse remains concentrated in energy, with limited evidence of broadening across categories.

Within core, shelter continued to contribute positively but at a slower pace. More broadly, medical care, airline fares, and recreation posted gains, while household furnishings declined. On a YoY basis, core inflation remains anchored in services, though the recent moderation in monthly prints suggests no clear sign of reacceleration in underlying services inflation.

What does it mean for investors?  

Today’s CPI report came broadly in line with consensus expectations, excluding the MoM core cpi print which had a modest downside surprise. Although the majority of today’s data isn’t congruent with an improving inflation outlook, the small downside surprise in core MoM, primarily driven by shelter, is a welcome sign for policy makers. Still, there just isn’t enough progress being made on broader inflation front to warrant easing this year. No meaningful change in the policy path moving forward from today’s data release. As it stands today, there’s a 64% probability for a 25-basis point hike priced into the October meeting and a 100% probability for a 25-basis point hike priced into the December meeting.

Attention now shifts to PPI tomorrow morning, particularly given how producer prices have been tracking relative to CPI since the onset of the conflict. PPI has been running meaningfully hotter than consumer prices, with the spread between the two now north of 200 basis points, the widest gap since 2023. If that divergence persists, it poses a meaningful headwind to S&P 500 corporate margins that are sitting at all-time highs.

Treasury yields drifted lower following the CPI release, but the reprieve was muted, with low single digit basis point declines across the curve as of this writing. The release valve for inflation tied to the Iran conflict continues to show up in rates rather than equities. Precious metals have been particularly sensitive to this, with both gold and silver breaking below their 200 day moving averages in recent days. They both saw a modest bounce post print, but the sentiment remains weak against the backdrop of higher real rates. Equities were decidedly risk off going into the print this morning, so the bar for “good news” was low. With that said, stock pared back a decent clip of their overnight session losses.

The incoming Fed chair, Kevin Warsh, will certainly have his work cut out for him as markets price in a policy path firmly at odds with his recent commentary. The market narrative has slowly crept this year from: How much will the Fed ease? To when will the Fed ease? To will the Fed ease? To will the Fed hike? To when will the Fed hike? To how much will the Fed hike?