August Core CPI Beats Forecasts at 0.3%, Bolstering Case for Fed Rate Hike at September Meeting

U.S. consumer prices rose 3.4% year over year in August, matching both the prior month and economist estimates, but the details beneath the headline figure carried a hawkish surprise. Core CPI, which strips out food and energy, climbed 0.3% month over month, topping the 0.2% consensus estimate and the 0.2% gain recorded in July. On an annual basis, core CPI eased slightly to 2.4% from 2.5%, in line with forecasts.

The hotter-than-expected monthly core reading was driven in significant part by a record surge in wireless phone service prices, which jumped 5.9% in August, the largest increase on record. That single component added roughly 0.08 percentage points to core CPI and is expected to feed through into the Fed's preferred core PCE measure as well. Housing inflation came in softer than expected, though its lower weight in PCE limits how much that softness offsets the other pressures.

Supercore CPI, which excludes shelter and is closely watched by Fed policymakers, accelerated sharply to 0.511% month over month from 0.189% in July, pushing the annual supercore rate to 3.022% from 2.843%. The report arrives one day after a similarly persistent PPI reading and one week before the Federal Open Market Committee's September meeting. Markets moved quickly to price a rate hike as near-certain, with September FOMC pricing rising to just under 23 basis points immediately after the release, effectively a full hike expectation. An UBS note circulating after the data argued that Fed Chair Warsh, having delivered hawkish prepared remarks at Jackson Hole, would face a serious credibility blow if the committee failed to follow through with a hike given the incoming data.