LIVE MARKETS-The consumer seesaw: CPI heats up, mood cools down

Investors were biting their nails ahead of the Labor Department's August Consumer Price Index (CPI), falling just days before Warsh & Co convene for their first policy meeting in two months. The CPI report, which tracks what urban consumers pay for a basket of goods and services, showed prices increased by 0.4% last month, an abrupt acceleration from July's 0.1% print. Year-over-year, CPI repeated the prior month's 3.4% increase. Both readings hit analyst expectations on the nose. But core CPI, which strips out volatile food and energy prices and is often referred to as "underlying inflation," came in hotter than consensus on a monthly basis, inching up to 0.3% from the previous month's 0.2% gain. Annual core CPI behaved by agreeing with consensus, printing at a still-hot 3.4%, echoing July's rate. It's the third take on August inflation, after last week's wage growth data and Thursday's PPI. None of them point to the conclusion that inflation is moving toward the Fed's average annual 2% target. The report has raised rate hike expectations. In the wake of the report, financial markets are pricing in an 85.6% probability of a 25-basis-point increase to the Fed funds target rate at the conclusion of next week's meeting. That's up from 69.4% just prior to the release. The report "could be the nudge that pushes the Fed from patience to action," writes Ola Sonola, head of U.S. economics at Fitch Ratings. "This is not simply an energy story; underlying inflation remains elevated across a wide range of categories," Sonola adds. "The Federal Reserve now faces an uncomfortable choice: surprise markets with a hold or validate market expectations with a September rate increase." "For a Fed that has repeatedly emphasized data dependence, the latest data make it increasingly difficult to justify a pause." Concerning the folks affected by consumer prices, the mood of the American consumer, who shoulders about 70% of the U.S. economy, has soured by 7.5% this month, a much steeper drop than the 1.4% dip economists projected. The University of Michigan's (UMich) initial take on September consumer sentiment showed survey respondents' assessment of current conditions deteriorated by 1.9%, but near-term expectations tumbled 11.1%. "Democrats and Republicans alike posted sizable declines, while independents were little changed from August," says Joanne Hsu, UMich's director of consumer surveys. "Year-ahead expectations for both personal finances and business conditions plunged." "With a resurgence in fuel prices and trade tensions, consumers anticipate greater pressures on their pocketbooks to come," Hsu adds. The closely scrutinized inflation expectations element showed survey participants' near-term inflation expectations shot up to 4.6% from 4.0%. That's 2.2 ppts hotter than today's year-on-year core CPI print. Longer-term, consumers expect annual inflation of 3.4% five years from now, up from 3.3% last month. Line-by-line, a 2.1% monthly jump in energy prices prompted a 3.9% increase at the gasoline pump. Transportation costs rose 1.2% and the cost of an airline ticket rose by 2.7%. Year-on-year, gasoline and airfares have surged 27.4% and 23.4%, respectively. The cost of shelter and services, two metrics closely watched by the Fed, both rose by 0.3%. Year-over-year, shelter prices have risen by 3.0% and services show annual growth of 3.1%. Both continue to coast well north of core inflation, not to mention the Fed's target. "Elevated oil prices are the tip of the iceberg," says Skyler Weinand, chief investment officer at Regan Capital. "We are seeing a domino effect down to diesel and jet fuel, higher shipping prices and higher input costs, all of which will lead to elevated goods prices this fall through at least next summer."

LIVE MARKETS-The consumer seesaw: CPI heats up, mood cools down

CPI heats up ahead of Fed meeting

Consumer sentiment and inflation expectations weaken

Energy, shelter and services keep pressure on prices

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