The Fed vs. inflation

Analysis: The inflation surprise looks better than it actually is

The unexpectedly sharp slowdown in US inflation in August is largely explained by changes in measurement methods and downward revisions of previous inflation figures. This is according to Barron’s Megan Leonhardt and DI’s Nils Åkesson, following Wednesday’s PCE figures from the statistical agency BEA.

"Furthermore, Wednesday’s release contains relatively old figures that do not capture the recent sharp rise in diesel prices," writes Leonhardt.

The BEA’s previously announced new measurement methods "are no magic wand that suddenly turns down the temperature on prices," writes Åkesson. The inflation news is merely "a mirage" for those hoping the Fed will view it as an argument against further interest rate hikes. This explains the market's relatively lukewarm reaction, he reasons.

CNBC’s Fred Imbert also notes that the market's positive reaction is cautious, but instead highlights...

US core inflation falls – market cheers

US inflation, as measured by the Federal Reserve’s key metric—core PCE—fell unexpectedly in August to an annual rate of 3.0 percent. This is shown by new figures from the statistical agency BEA.

It had been expected to remain at the previous month's level of 3.3 percent, according to a forecast compilation by Trading Economics. According to analysts, the major surprise is largely explained by changes in measurement methods and the simultaneous downward revision of previous inflation figures.

Standard PCE inflation fell to 3.4 percent, compared to an expected 3.7 percent.

At the same time, data from payroll processor ADP shows stronger-than-expected employment figures. Employment in the US private sector rose by 90,000 in September, versus the 75,000 expected in a Bloomberg survey.

US stock markets strengthened markedly in pre-market trading, and long-term market interest rates turned lower following the inflation announcement. The Stockholm stock exchange also initially saw a sharp rise.

Market sentiment shifts – lower expectations for a Fed rate hike

Market expectations that the Federal Reserve will raise the US benchmark interest rate in October are waning following today's news that core inflation unexpectedly slowed in August.

The futures market is now pricing in a 35 percent probability of a 25-basis-point hike. Yesterday, the probability of a hike was priced at 51 percent, compared to 49 percent for the rate remaining at 3.75–4.00 percent, according to CME FedWatch.

...today's unexpectedly strong job figures from ADP as an explanation.