'US Inflation Cooling Raises Bond Prices and Lowers Dollar; Early September Tapering Unlikely (Comprehensive)'

Expectations Grow for Tapering Announcement in November, Not September, as August CPI Increase Slows

[Asia Economy New York=Correspondent Baek Jong-min] The US Consumer Price Index (CPI) for August rose slightly less than expected, but the level of inflation continued its high trajectory. Amid analyses suggesting a reduced likelihood of a tapering decision at the Federal Open Market Committee (FOMC) meeting next week, US Treasury prices rose and the dollar value declined.

The US Department of Labor announced on the 14th (local time) that the August CPI increased by 0.3% compared to the previous month. This was a slowdown compared to the market expectation of 0.4% and the previous month's 0.5% increase. CPI had risen by 0.9% in June and 0.5% in July, respectively.

[Image source=Reuters Yonhap News]

The August CPI rose 5.3% year-over-year, slightly down from 5.4% in the previous month.

The core CPI, which excludes fuel and food, showed an even smaller increase. Core CPI rose 0.1% month-over-month, significantly below the market expectation of 0.3%. On an annual basis, it increased by 4.0%, showing a notable slowdown compared to the expected 4.2% and the previous 4.3%.

Prices of used cars, which had driven inflation increases, fell by 1.5%, and hotel and airline fares also declined compared to July.

CNBC reported that although the August CPI remains at the highest level in 13 years on an annual basis, it could signal a calming of inflationary pressures.

The market's focus is on the impact of this CPI on the Fed's tapering. The prevailing view was that this CPI would significantly influence the Fed's decision on tapering at the upcoming FOMC meeting.

The Fed has emphasized that inflation is temporary but has indicated that tapering will be decided considering employment goals, as the inflation target among monetary policy objectives has already been met.

The New York Times reported that the slowdown in August CPI growth is welcome news for the White House and the Fed. The White House has maintained the stance that inflation is temporary along with the Fed. Since interest rate hikes driven by inflation increases inevitably affect the Biden administration's large-scale investment policies, the White House is also cautious about excessive inflation.

Jared Bernstein, a member of the White House Council of Economic Advisers, said, "The August CPI aligned with the expectations of the White House, the Fed, and most experts. We will continue to carefully monitor the indicators."

The Fed's Beige Book released last week mentioned a slight decline in August economic activity, and with August employment falling short of expectations and signs of inflation slowing, the likelihood of a tapering decision at the September FOMC is reduced. Earlier, the Wall Street Journal (WSJ) predicted, based on Fed officials' remarks, that Fed members would attempt to reach an agreement in September for tapering to be implemented in November.

Art Hogan, chief investment strategist at National Securities, said, "The Fed will discuss tapering at the September meeting but is expected to announce implementation within the year at the November meeting."

Shepardson from Pantheon Macroeconomics, chief economist, forecasted, "The recent slowdown in economic indicators will ease market and Fed inflation expectations."

Fiona Cincotta, senior analyst at City Index, explained, "With weakening inflation indicators, investors have reduced expectations that the Fed will start tapering early."

Given that the Fed has effectively signaled tapering within the year, if no tapering decision is made at the September FOMC, it is highly likely to be decided at the November FOMC.

A major foreign news outlet also reported that most experts expect the tapering decision to come at the November rather than the September FOMC.

The market reflected this assessment. On the day, the US 10-year Treasury yield fell further after the CPI announcement, dropping by 0.047 percentage points to 1.277%. Treasury prices rose. As Treasury yields declined, the dollar's upward momentum weakened, and gold prices recovered to the $1800 per ounce level.

The slowdown in the dollar's rise is analyzed as reflecting uncertainty about the timing of the tapering decision.

Major New York stock indices, which started higher on the inflation slowdown news, retreated and closed down across the board.

There are also claims that concerns about high inflation cannot be dismissed. WSJ reported that many economists worry about greater inflationary pressures in the fourth quarter. It is expected that CPI will rise as housing rents are fully reflected. August housing rents rose 0.3% compared to the previous month. Housing rents account for 30% of CPI increases.

Jim Cairon, Morgan Stanley portfolio manager, predicted, "With continued increases in housing rents, it may take longer for inflation to decline."

This content was produced with the assistance of AI translation services.