CPI Comes in Line With Expectations

• CPI rose 0.4% month-over-month in August (0.3% core), with year-over-year inflation flat at 3.4% and core inflation declining to 2.4%, the lowest of 2026
• Wide 200 bps gap between PPI (5.4%) and CPI (3.4%) indicates retailers are absorbing wholesale price increases rather than passing them to consumers
• Bond yields jumped to multi-year highs with the 10-year reaching 4.97% and 30-year hitting 5.32%, while oil prices rose 7.5% week-over-week to $99/barrel WTI

Summary: CPI Meets Expectations Amid Wide Wholesale-Retail Inflation Gap

Key Inflation Data:

The August Consumer Price Index (CPI) aligned with forecasts, showing month-over-month growth of +0.4% (up from +0.1% in July) and core CPI at +0.3% (versus +0.2% in July). Year-over-year inflation held steady at +3.4% for the second consecutive month, while core inflation improved to +2.4%, marking 2024 lows. This represents a significant cooldown from the May peak of +4.2%.

Wholesale vs. Retail Divergence:

A notable discrepancy emerged between wholesale and retail inflation. The Producer Price Index (PPI) released yesterday showed headline growth of +5.4% and core at +4.8%, creating an extraordinary 200-240 basis point gap with CPI figures. This suggests retailers are absorbing substantial inflation costs rather than passing them to consumers, raising sustainability concerns.

Federal Reserve Implications:

The inflation data has increased odds of an interest rate hike at next week's FOMC meeting to 88%. A 25-basis-point increase would push the Fed funds rate to 3.75-4.00%, the highest since early December. However, uncertainty surrounds new Fed Chair Kevin Warsh's approach, particularly given President Trump's preference for lower rates.

Market Response:

Bond yields initially spiked—the 10-year reaching 4.97% (October 2023 levels) and the 30-year touching 5.36%—before retreating slightly. Pre-market futures rallied after four consecutive down sessions. Oil prices dropped 3% to $99/bbl (WTI) and $104 (Brent), though remain up 7.5% week-over-week amid Middle East tensions.