Wall Street reacts to the latest US inflation data

Investing.com -- Wall Street analysts reacted to the latest US inflation data, highlighting its impact on upcoming Federal Reserve decisions and market expectations.

Consumer prices rose by 2.5% over the 12 months to August, marking the slowest pace since February 2021. It was down from 2.9% in July.

Analysts at Vital Knowledge suggested that while the inflation report might dial back expectations for a 50 basis point (bp) rate cut next week, it is unlikely to significantly change the Fed’s stance.

“Even if they start small on 9/18 (25bp instead of 50bp), the decision in aggregate (statement, supplemental, and press conf.) is likely to be quite dovish," wrote the firm. ” They added that the gap between inflation and the Federal Funds Rate is widening, pushing the Fed toward easing.

Capital Economics acknowledged that inflation appears mostly under control but cautioned that persistent housing inflation could complicate the Fed’s plans. They expect the Fed to take a "measured approach" to interest rate cuts, pointing out that inflation hasn’t been “completely vanquished.”

Oppenheimer focused on food inflation, noting a slight deceleration in “food-at-home inflation,” which was up 0.9% year-over-year in August. They described the inflation backdrop as a "modest negative" for grocers but saw the potential for a more favorable setup in consumer staples amidst lower rates.

Citi indicated that the latest inflation figures might prompt the Fed to cut rates by 25bp rather than 50bp. They added that core PCE inflation has a benign outlook, with three-month annualized core CPI at 2.07%, forecasting continued rate cuts into November and December.

Morgan Stanley (NYSE:MS) agreed with the 25bp cut projection, citing a modest inflation surprise driven by strength in services, but noted that this report closes the door on more aggressive cuts this year.

Evercore ISI described the CPI report as “dishearteningly high,” driven by gains in rents and airline fares, but suggested that inflation is continuing to cool overall.

They expect higher Treasury yields in the near term but remain optimistic about lower rates in the future.

Overall, while the inflation data was slightly above expectations, most firms predict the Fed will opt for a smaller, 25bp cut next week, maintaining a cautious but optimistic outlook on inflation cooling over time.