Core CPI Runs Hot at 0.3 Percent as a Fed Hike Hits the Table

On Thursday morning I had my eyes locked on the 8:30 data screen: futures markets priced a 69.4 percent chance the Fed hikes rates next week. Consensus for core CPI was 0.2 percent, with 67 of 73 estimates coming from qualified economists; in a band that tight there was almost no room for surprise. That narrow band was the first half of the day's story.

The print came in hot: core rose 0.3 percent for the month, 0.29 percent unrounded. With expectations at 0.21 percent unrounded, this was no 0.25 rounding up to 0.3, it was nearly a full 0.3 surprise. Headline CPI matched forecasts at 0.4 percent monthly and 3.4 percent yearly, while yearly core eased from 2.5 to 2.4 percent. The monthly core pace was the strongest since April.

I laid out in the broadcast why core matters more than the headline: the Fed wants to see whether higher oil prices are bleeding into everything else. Energy can inflate the headline, but core is the test of whether inflation has reached the capillaries. That test came back warm.

The item that stopped me cold inside the report was the 1.8 percent jump in education and communication services, a basket with nearly 5 percent weight. Elementary and high-school tuition plus daycare and preschool drove it, and the data stays hot even after seasonal adjustment. August has a back-to-school effect, yet the adjusted picture barely cools. This is a textbook core component and looks like the first stop of energy-driven costs passing into services.

Transportation services rose 0.5 percent, with motor-vehicle repair at 1.8 percent and truck rentals at 2.2 percent standing out. Rentals are snapping back from minus 3 percent last month, a sharp reversal. Commuting and travel costs are climbing; small weights, but the direction is uniform.

Shelter looked tame at 0.3 percent monthly, with owners' equivalent rent at 0.2 percent. But this series lags reality, and lodging away from home bounced after two steep negative months. Water and trash collection rose 0.5 percent on a 1.1 percent weight, with an obvious diesel link. Medical services fell 0.2 percent and hospitals were flat, one of the month's rare pieces of good news.

Goods were mixed: men's suits and outerwear up 2.1 percent, major appliances up 1.4 percent, laundry equipment up 2.8 percent. Furniture stays weak, with inventory-bloated retailers struggling. Energy rose 2.1 percent for the month as fuel oil spiked 10.1 percent; the 3.9 percent gasoline jump alone carried over a third of the headline advance. Lettuce falling 6.2 percent was the day's smile break.

Independent data confirms the picture: communication up 2.3 percent, airline fares up 2.7 percent, education up 0.8 percent, used cars up 0.4 percent. All of these sit inside core, so the oil noise did not stay in the headline, it seeped into core. That was exactly the fear I set out in the broadcast's first two minutes, and the data proved it right.

Markets repriced fast: hike odds jumped to 90 percent for next week, an October hike is priced at 100 percent, and 1.7 hikes are priced through December. Timiraos's note sharpened the table: the core gain was 0.29 percent unrounded and the three-month annualized rate rose from 1.6 to 2.0 percent. The six-month rate moved up too, while the twelve-month barely budged.

What struck me was the Nasdaq 100 shrugging at first; I read that as a catalyst-clearing event. Markets swallowed the hike and started looking past the data and the Fed meeting. On the political front I am logging my speculation that Trump could announce a surprise deal with Iran at the top of the oil spike; I also note Warsh holds a single vote and the rest of the committee cannot ignore a hot print.