Well, let's get straight to the point, because last week we got the latest inflation reading.
Core inflation in the US is now at its lowest level since spring 2021. Yes, you read that correctly. The lowest level in five and a half years.
And yet. Markets are currently pricing in a 90% probability that the FED will RAISE interest rates next Wednesday.
How is that possible? How can inflation be falling while everyone is expecting a rate hike?
The answer is hidden in two reports that came out within two days of each other.
BUSINESS INFLATION
Let's take it step by step. On Thursday, we got the PPI. What exactly is that? In very simple terms, it's the inflation businesses are facing. The producers. Before higher prices reach us, on store shelves, they first pass through them.
And the numbers weren't pretty at all. The index rose 0.4% in a single month, exactly as analysts expected. On an annual basis, however, it reached 5.4%, up from 4.8% the previous month.
The most interesting part? Goods prices surged 1.1%, after two consecutive months of declines. And Core PPI, which excludes food and energy, rose to 4.6% annually from 4.3%.
"Why should we care about what businesses are paying?" you might be wondering.
Because, quite simply, someone is going to pay the bill. And that someone is us. As Heather Long, chief economist at Navy Federal, put it: prices are rising faster for businesses than for consumers. And businesses will pass most of those costs on to consumers.
But there's something even worse. As another analyst warned, the pressure doesn't stop here. Oil prices have continued rising after the August data was collected, and that affects the cost of almost every product and service.
AND NOW THE CONSUMERS
On Friday, we got the CPI. The inflation we actually experience in our everyday lives.
Headline inflation rose 0.4% in August and came in at 3.4% annually, exactly as the market expected. More than one-third of that increase came from gasoline, which rose 3.9% in a single month. Energy overall rose 2.1%. And housing increased 0.3%, its biggest increase in three months.
But this is where things get more interesting. Core CPI rose 0.3%, while everyone was expecting 0.2%. And to understand just how unexpected this was: of the 73 analysts surveyed by Bloomberg, only nine got it right.
And what was responsible? Wireless phone service prices, which jumped 5.9%, marking an all-time record. That alone added roughly 0.1 percentage point to core inflation. Without it, the figure would have been 0.20% rather than 0.30%. Analysts at Bank of America and Barclays point to changes in AT&T and T-Mobile plans, which eliminated older plans and raised prices.
Something else also showed up. Computer software and accessories rose 25.4% over the past year. The highest rate ever recorded. In other words, the AI boom is no longer just showing up on stock charts. It has also started affecting inflation.
And despite all of that, on an annual basis Core CPI fell to 2.4% from 2.5%. The lowest level since 2021.
THE FED'S DILEMMA
So what does the FED do now? It has to make its decision on Wednesday, September 16. And analysts are now fiercely divided.
On one side, Joseph Brusuelas of RSM says there is no other option. He points to three persistent supply shocks: the war affecting energy, tariffs, and enormous demand for materials due to AI infrastructure. He argues that the FED should reverse the three rate cuts it made at the end of 2025.
Chris Zaccarelli put it even more simply: the FED has its back against the wall.
On the other hand, there is the opposing argument. Parker Ross makes a point that makes a lot of sense. Is the FED really going to raise interest rates to bring down people's phone bills? Meanwhile, Marko Bjegovic takes it even further, calling it a massive policy error to raise rates when core inflation is at five-year lows.
So you might ask me, who's right?
Even Brusuelas admitted that it's literally a coin toss.
