US Inflation Higher Than Expected in August, Bitcoin Dips 4%

U.S. inflation decelerated in August, but remained higher than what economists had expected, a sign that the U.S. Federal Reserve will stay aggressive in raising interest rates.

The consumer price index rose 8.3% in August from a year earlier, a mild slowdown from the 8.5% reported for July. Economists at FactSet had forecasted a 8.1% increase, and so the number was slightly higher than expectations.

On a month-over-month basis, inflation rose 0.1% from July, when inflation remained unchanged, which many economists and politicians saw as a huge success.

Bitcoin (BTC) rose 15% over the weekend in anticipation of a positive report for August but dropped 4% after the new numbers were released. Ethereum (ETH), which has largely been trading in an upward trend because of its upcoming the Ethereum Merge, a software update, dipped 5%.

Core CPI, which strips out more volatile food and energy prices, rose 0.6%, a much larger increase than in July.

Tuesday’s report will provide key guidance for the central bank’s September meeting next week, during which members of the Federal Open Market Committee will likely decide to raise rates by another 75 basis points, or 0.75 percentage point.

The jobs report earlier this month revealed that the labor market, although still robust, is starting to slow amid rising labor costs, which signals that the Fed’s policy changes are starting to take effect. But with a still very strong labor market and high inflation, there is little reason for the Fed to stop its aggressive approach just yet.

An army of Fed speakers in recent weeks have also shown that they are marching to the same beat and are willing to do whatever it takes to defeat inflation.

“The release can potentially be a dial mover for how hawkish Chair Powell’s press conference will be and by extension the direction of risk sentiment and market pricing in the near term,” said Anthony Woodside, senior solutions strategist at LGIM America, a global institutional asset manager, referring to Fed Chairman Jerome Powell.

Several FOMC officials have said that the central bank will keep its front-loading approach, meaning that it will hike rates fast now and let the rates sit for a while once the bank's preferred rate is reached. But traders have been wondering what that rate is, and it seems as though central bankers have different opinions on that matter.

“Increased clarity on 'how high' the terminal rate may go can help define risk and volatility in a market that has been plagued by limited visibility,” Woodside said. “We believe the terminal rate will at least reach the 4% threshold this cycle.”