Economists at CIBC reviewed the August CPI report, noting a slight increase. Despite this, it is not expected to prevent the Federal Open Market Committee from reducing rates by 25 basis points.
Core inflation remained steady at 3.1% annually, with the headline rising to 2.9%. Concerns were raised over increasing price hikes, particularly in core goods due to tariff pass-through.
Impact Of Tariffs
New car prices showed a notable rise, hinting at the broadening impact of tariffs on large-ticket items. CIBC predicts the Federal Reserve will reduce rates in September and October, followed by a pause.
Market speculation anticipates 121 basis points in easing by June 2026. The overall US inflation remains below the target, offering the Fed flexibility as economic and job market concerns persist.
If there wasn’t a strong inclination against lowering rates, the Federal Reserve might adopt a more gradual approach. The next Fed decision is scheduled for 17 September.
We should be positioned for the expected 25 basis point rate cut on September 17th, likely through interest rate futures. The latest JOLTS report from August showed job openings falling below 9 million for the first time since early 2023, giving the Fed the justification it needs to ease. This reinforces the view that the path of least resistance for rates is lower in the immediate future.
Price Pressures And Easing Concerns
However, the broadening price pressures from tariffs introduce significant uncertainty for the coming months. We saw a similar dynamic back in the 2018-2019 period, where tariffs on goods led to a slow but steady rise in consumer prices after a short delay. This suggests considering positions in inflation swaps to hedge against the possibility that inflation remains stickier than the Fed currently anticipates.
This conflict, where the central bank is easing policy into a 3.1% core inflation reading, is a classic setup for increased market volatility. With the VIX index currently sitting low in the mid-teens, around 14.5, options pricing seems to underestimate the potential for sharp market moves. Buying VIX calls or using options straddles on major indices could be a prudent way to trade this divergence.
Looking further out, the market is pricing in over 120 basis points of cuts through the middle of 2026. If tariff-related inflation from items like automobiles proves more persistent, this aggressive easing path might be challenged later next year. This could create opportunities in longer-dated SOFR options, betting that the total number of cuts will be fewer than what is currently priced in.
