Why The Core CPI Inflation Drop In August Doesn't Matter

The August inflation report was a cheerful one. Not only did headline inflation remain unchanged, but core inflation fell to over 5-year lows, and the stock markets ended the session well. This is despite the fact that rate hikes are coming. There's an undeniable likelihood of monetary tightening at the forthcoming FOMC meeting to meet the Fed's target inflation rate. While real activity data like labor markets support a hike, higher rates and higher inflation do lend uncertainty to the economy, making defensives like healthcare attractive.

At any other time, a drop in core CPI inflation to an over-5-year low would be reason to rejoice. After all, the component represents the sticky part of inflation. One that takes longer to cool