US Core CPI Forecast to Drop to 2.4% in August, Influencing Fed Rate Decisions

The upcoming inflation report for August, scheduled for release on September 11, is expected to provide insights into the trajectory of core inflation in the United States. Analysts are projecting that the core Consumer Price Index (CPI) will register between 2.3% and 2.4% year-over-year, a decrease from July's figure of 2.5%. This anticipated decline could give the Federal Reserve the flexibility to keep interest rates steady as they prepare for their next meeting.

The core CPI, which excludes the more volatile food and energy prices, showed a year-over-year increase of 2.5% in July, along with a month-over-month gain of 0.2%. This was the lowest annual reading in five months, indicating a potential easing of inflation pressures. For August, TD Securities has estimated a year-over-year figure of 2.3%, with a month-over-month increase of approximately 0.19%. Other forecasts suggest a slightly higher figure around 2.4%.

Prediction markets, such as Polymarket, reflect similar expectations, with traders assigning a 42% probability to the core CPI landing at 2.4% and a 34% chance for 2.3%. Meanwhile, the all-items CPI is projected to remain steady at about 3.4% year-over-year.

The primary factor contributing to the anticipated decline in core CPI is the ongoing decrease in goods prices, particularly in categories such as used cars, apparel, and household furnishings, where prices have been normalizing following post-pandemic surges. In contrast, services inflation remains robust, particularly in housing costs, which continue to support the services component of the CPI. Rent and owners’ equivalent rent are slow to adjust, even as the broader economic environment cools.

Analysts have also noted potential risks from tariff-sensitive goods, which could lead to higher retail prices and counteract the overall disinflation trend in goods. The September Federal Open Market Committee (FOMC) meeting is a significant event on the horizon, and the August CPI report will be one of the last major data points the committee considers before making its rate decision.

Conversely, if the core CPI exceeds expectations, particularly if it reaches 2.6% or higher, it could disrupt the current market narrative, prompting rapid adjustments across various asset classes. The August report will also shed light on whether the disinflation trend is sustainable as the economy moves into the fourth quarter. The previous month’s soft reading could either be an anomaly or signal the beginning of a consistent move toward the Fed's 2% target for core inflation. Two consecutive readings of deceleration would strengthen the argument for a more dovish monetary policy stance.