A September Rate Cut?
Inflation has cooperated; your move, Fed
Since Beastflation ravaged our macroeconomic lives, things have calmed down.1 From June of 2023 through July 2024—the last 14 months—the CPI rate of inflation has averaged 3.3 percent.
Figure 1 displays the monthly rate of inflation as measured by the Consumer Price Index (CPI) since 2019; Beastflation is highlighted in red, while post-Beastflation is colored in yellow. On the one hand, a 3.3 percent rate of inflation is not great, as that average is well above the monthly average that predates Beastflation. On the other hand, at least it’s not Beastflation.
In the least, the consistency of the CPI rate of inflation the past 14 months is something to be optimistic about. The highest rate since June 2023 was 3.7 (August of last year) and the lowest rate equaled 2.9 percent, which we just hit in July.
Next Friday (September 13th) we will know more as the Bureau of Labor Statistics (BLS) will release the CPI reading for the month of August. What will that tell us? Given the steadiness of the rate of inflation the past 14 months, I’m willing to bet the rate will be right around 3 percent if not a bit lower (more on that shortly).
Why is such speculation important? Among many reasons, not least of which is the Fed will hold their September meeting the week following the release of August’s CPI number. As of today (Sept. 6th at 4:30 Eastern time), Fed Futures Markets is revealing a 71 percent probability of a 25 basis point cut at the Fed’s September 18th meeting, and a 29 percent change of a 50 basis point cut (Macrosight wrote about the Fed Futures market here).
Those probabilities add up to 100 percent--meaning the Fed Futures Market has no doubt the Fed is going to cut the interest rate! (Traders only disagree by how much.)
What will the August CPI-rate of inflation be?
So, Fed Futures traders are super confident the Fed is going to cut the federal funds rate target. That implies the Fed Futures market is not expecting a jump in the rate of inflation (otherwise, 100 percent of traders would not expect the Fed to cut rates). And, by September 18 the Fed will know what the rate of inflation for August was . . . SOOO, what will that number be?
Macrosight’s forecast is that the CPI-rate of inflation for August 2024 will be 2.8 percent (on an annualized basis).2 If that turns out to be the case such a number suggests the disinflation of the past 14 months is continuing, giving credence to the Fed Futures market’s optimism.
This time next week we will be able to judge the accuracy of that forecast. And soon after we will get to see how the Fed responds. Macrosight can’t wait!
Over the 26 months spanning April 2021 through May 2023, the CPI rate of inflation averaged 6.6 percent, reached a high of 9 percent, and never fell below 4 percent).
To arrive at that number (2.8 percent) I used a forecasting model estimated on CPI data going back to 2000 (sample size of 295 months), with the last four months of the variable as the inputs. The results of that model provided the weights to include in the forecast. I then multiplied those four weights by the values of CPI inflation from the last four months (July back to April), added those terms to the intercept generated from the aforementioned model, which gave me the prediction for August equal to 2.8 percent. This is the same methodology Macrosight has explained here and here.