Aug CPI Shouldn't Alter Next Week's Forecasts

There's no reason the largely in-line August CPI report will affect either the decision or the communications out of next week's FOMC meeting, versus what we knew prior to the data release. MNI still expects a rate hold, with a drop in the new core PCE forecasts, and the Dot Plot still likely to signal one last 2023 hike.

• First and foremost, headline CPI was exactly in line with expectations at 0.6% M/M. While that's a sharp pickup from 0.2% prior and the fastest rise since June 2022, it was fully anticipated on the back of higher sequential energy prices.
• Energy's ongoing rebound is a good reason to expect FOMC participants to be more cautious than would otherwise be the case - and keep their headline PCE inflation forecasts somewhat elevated in the latest set of projections. They'll be mindful as well that it could help slow the ongoing relenting of household inflation expectations. But again, this was not a surprise today.
• As for core, it's unclear how much the above-expected reading (0.28% M/M) will impact the likely fall in the core PCE forecasts in the September round.
• The ex-shelter services "supercore" metric accelerated but the other categories key to the FOMC's disinflationary thesis - core goods deflation and softening shelter prices - remained intact.
• MNI is currently pencilling in a drop in the 2023 core PCE forecasts to 3.5 or 3.6% (vs 3.9% in June's projections) next week. 2024's figure (2.6%) may not change much though.
• Pending Thursday's PPI report, JPMorgan's tracking estimate for Aug core PCE is 0.17% M/M / 3.8% Y/Y. That would be the lowest Y/Y print since May 2021. Morgan Stanley sees it even softer at 0.15% M/M; with core services ex-housing at just 0.16% (owing to differing methodology). The PCE release isn't until the end of the month though.
• In the meantime, while the preponderance of evidence is that inflationary pressures are cooling, August's CPI report didn't provide sufficient downside surprises to allow the Fed to back off of its tightening bias - we'd still expect a 2023 median Rate dot of 5.6% next week.