According to numbers released yesterday by the US Bureau of Labor Statistics, CPI remained high in August, with prices increasing by 8.3 percent year-on-year after an 8.5 percent increase the month previous. In monthly terms, the index was up 0.1 percent for August.

The data release had a predictable impact on equity markets, which were broadly expecting a slightly lower result of 8.1 percent: at end-of-trading, the Dow Jones was down 3.9 percent and the Nasdaq 5.2 percent. US yields have also responded to the news. The 2-year Treasury, hit 3.805 percent overnight, its highest level since November 2007. The 10-year Treasury was also breaking decade highs trading at 3.466 percent. The yield curve gap between the two – generally considered an indicator of coming recession – widened significantly as markets digested the new numbers.

This markedly negative reaction is down to two factors. First, the new data seemingly validates recent hints from Fed chief Jerome Powell that there’s still more pain for markets to endure before inflation can be properly brought under control – a narrative that runs contrary to the false sense of security that had settled over markets, fueling a mini rally from June through August.

Second is the actual substance of the inflation report, which suggests that inflationary forces are anything but fleeting in the current interest rate environment. Some energy prices, which are highly susceptible to geopolitical events (ie the Ukraine war) and frequently blamed for persistent inflation, actually plummeted in August, namely gasoline which was down 10.6 percent (electricity and gas were up month-on-month by 1.5 and 3.5 percent respectively). Food was also up 0.8 percent in the month. But so too was nearly everything in the all items except food and energy index, including new vehicles (0.8 percent), services (0.6), medical care (0.2), and apparel (0.2). The overriding takeaway from the CPI report is that inflation has yet to meaningfully reverse its trajectory, necessitating more aggressive rate hikes in the future.