U.S. inflation and employment market signals suggest the Fed is very likely to cut interest rates at its meeting next week. The U.S. Consumer Price Index (CPI) data for August came in at 2.9% year-over-year, with core inflation (excluding volatile food & energy) steady at 3.1% y/y. These readings are higher than the Fed’s 2% target, but not wildly so. Investors are happy to buy, there is no bad news in the numbers, they know the U.S. government is happy with inflation running above 2%. Governments sometimes benefit from moderately higher inflation, since it reduces the real value of debt. Still, no U.S. administration would publicly say they want inflation above 3%, because voters dislike higher prices.
I don’t think the government will be happy with 3% or higher, At 3%+, inflation begins to erode purchasing power faster and creates uncertainty in contracts, wages, and investments. Businesses and households can adapt to a little inflation, but persistent levels above target make it harder to plan. As the economy is doing well and the Fed is about to cut rates, there is a real danger inflation will rise above 3%.