Yesterday the August inflation numbers were released, and as the chart below shows, August was a mixed bag.
The purple line is what is often called the headline inflation rate. This basically includes all goods and services. The year over year inflation rate in August decreased from 8.52% in July to 8.26%. This was mostly due to the decrease in oil prices
The yellow line is called the Core Inflation rate. This inflation rate excludes food and energy. This is the rate that Fed follows and on which it bases it’s interest rate policy. This rate increased from 5.91% in July to 6.32%.
This news sent stocks lower by around 4% after the market had rallied the previous few days. Stocks fell as investors probably rightly viewed the news as leading the Fed to continue to raise interest rates aggressively which increases the risk of recession next year sometime.
It is expected that when the Fed meets on the 20th and 21st this month that they will raise rates another .75%. Could the core inflation rate rise prompt them to raise rates more? Will it cause them to change their planned path on interest rate rises to include higher future rate hikes? If the answer to either of these is yes, a recession becomes more and more likely.