The stock market may trade cautiously into the release of the August PPI and CPI on Thursday and Friday, respectively, after the strong August Employment Report. The inflation data may be the deciding factor in persuading FOMC "fence sitters" to vote for or against a rate hike. One fence sitter, Fed Governor Barr, said last week that he may vote for steady policy if the CPI is benign.
A consensus-like August CPI would not eliminate the possibility of a September rate hike, but it would not guarantee one either. Consensus looks for a high 0.4% m/m increase in the August Total CPI, boosted by higher oil-related prices resulting from Iran war developments. A high Total, however, could be dismissed as temporary. In contrast, a consensus-like Core CPI would point to "sticky" inflation, which Fed Chair Warsh says is unacceptable. The Core is expected to print 0.2% m/m, which would equal the January-July average and remain above the Fed's 2.0% target on an annualized basis. The y/y would slip to 2.4% from 2.5% for Core. The downtick could be viewed positively by the Fed and stock market.
A lower-than-consensus print for both Total and Core also cannot be ruled out. Housing Rent (both Primary and Owners' Equivalent) would have to slow from July's 0.3% pace. And, Airfares need to be flattish to down as would some other typically volatile components like Used Car Prices and Lodging Away From Home.
Fed Chair Warsh, in his Jackson Hole speech, referenced a wide decomposition of the PCE Deflator among his arguments to hike rates (see last week's blog). A decomposition of the Core CPI by broad components shows most printing 0.2% or less in each of the past three months (see table below). However, the share was only just above 50% in May and July, when the Core CPI printed 0.2% overall. So, even though the decomposition differs from Warsh's PCE Deflator figures, it still shows that a broadening slowdown among CPI components is needed to achieve the Fed's inflation target. It is not clear whether FOMC fence sitters will need to see a broadening slowdown to keep rates steady and not hike rates. However, a broadening presumably would raise the possibility they will vote to keep policy steady.
Number of Broad Core CPI Components
0.2% or less 0.3% 0.4% or more Core m/m % change
May 8 (57%) 2 4 0.2
June 11 (79%) 1 2 0.0
July 8 (57%) 1 5 0.2
* number in parentheses is % of the distribution 0.2% or less.
The August Employment Report confirmed the Fed view of a solid labor market. Along with upward revisions to June and July, the +162k m/m increase in August Payrolls showed widespread, albeit mostly small, increases among sectors, with notable increases in Manufacturing and Construction. Payrolls in Leisure and Hospitality had the largest swing, rebounding 62k in August after falling 21k in July (mostly in restaurants). Excluding Leisure and Hospitality, Private Payrolls rose 65k in August after +92k in July. These are solid gains in this low job-creation environment.
The Household Survey confirmed the strength seen in Payrolls. The Unemployment Rate was steady at a low 4.1%. The broadest measure -- U-6 -- fell 0.2% point m/m to 7.7%. Both Civilian Employment and Labor Force rose. The Labor Force Participation Rate jumped to 61.6% from 61.4%, after having been in a downtrend since November 2025. The increase could reflect the small sample bias of the Household Survey. So, an upturn has to be confirmed over the next few months. However, it raises the possibility that an improving labor market is encouraging people to resume looking for jobs.
Besides the Payroll strength, the 0.1 Hour increase in the Nonfarm Workweek to 34.4 Hours shows better activity in the economy. Total Hours Worked (THW) rose 0.3% m/m in August, putting it 1.8% (annualized) above the Q226 average. THW rose 1.2% (q/q, saar) in Q226.
The 0.3% m/m increase in Average Hourly Earnings (AHE) in August supports the Fed's view that the labor market is not producing inflationary pressures. AHE has averaged 0.3% m/m since the start of 2025.
Trump's call for the Fed to lower the funds rate threw another wrench into the monetary policy debate, doubling down in a sense on Treasury Secretary Bessent's previous announcement of a shift out of long-dated government financing. Trump's call is puzzling, since it is a widely held belief that Presidential jaw-boning could backfire by pushing Fed officials to act in an opposite way to assert its independence. Perhaps Trump wants to disassociate himself ahead of the midterms from a tightening decision that may happen this month. Whatever the motivation, his jaw-boning is not likely to have an impact on the Fed. Fed officials' views of the economy should be the deciding factors.
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