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Investing.com-- A Federal Reserve rate cut is now almost fully priced in after Tuesday’s inflation data, but Scotiabank (TSX:BNS) Economics warns the latest numbers show core inflation is still too hot for the Fed to ease in September.
"Core CPI was warm and the breadth of price increases rose," Scotiabank said in a Tuesday note. "Core services drove most of the heat,” it added, following the latest inflation data released Tuesday.
The consumer price index rose 0.2% last month, slowing from the 0.2% in June. The slowdown in consumer prices in July, pushed the year-on-year increase in the CPI to 2.7% from 2.8% in June.
But a closer look at the July CPI data shows inflation’s pulse accelerated to its highest pace since January, with core consumer prices up 0.3% on the month, Scotibank said. While further inflation is due before the September meeting, "nothing in here says cut," it added.
Core services prices, which strips out housing and energy, jumped 0.48%, the strongest monthly pace since the start of the year. This translates to a 5.9% annualized run rate for services, outpacing cooler core goods inflation, according to Scotiabank.
But it isn’t just core services that is heating up. Price increases broadened across categories, hinting at stubborn momentum. Rents continued to rise, furniture prices soared, and recreation, prescription drugs, and hospital services all saw robust gains. While food and energy prices offered pockets of relief, with groceries slipped, gasoline falling, most measures pointed to persistent pressure, Scotiabank said.
The market, however, largely brushed the uptick in core inflation aside, reacting as if a cut is coming The odds of a September rate cut now standing at about 90%, according to Investing.com’s Fed Rate Monitor Tool.
But this dovish reaction is premature, warns Scotiabank. The FOMC majority isn’t likely to share a similar reaction, Scotiabank says, pointing to ongoing strength in underlying inflation and warning that a single report doesn’t resolve the case for policy easing.
Scotiabank also flagged "serious concerns about data quality", as the CPI basket increasingly relies on proxy estimates and alternative methods, due to "the Trump administration’s cuts to the BLS [Bureau of Labor Statistics] budget." Following the cuts at BLS as well as leadership changes, an "alarmingly high share of the CPI basket is made up data."
Ultimately, the market may think a rate cut is coming, but Scotiabank doesn’t see the Fed moving until the inflation picture cools off for real.