US Inflation Breadth Hits 6, September Hike Odds Surge Past 50%

Woofun AI reports that Goldman Sachs economist Jessica Rindels has identified a widening dispersion of US price pressures, a trend that echoes Federal Reserve Chair Jerome Powell’s recent congressional testimony regarding the risks of "widespread spread" in individual price increases. Although the current Personal Consumption Expenditures (PCE) inflation breadth exceeds the historical average observed from 1990 to 2019, Rindels’ analysis confirms that the severity remains significantly below the systemic crisis levels recorded in 2022.

The financial markets have reacted swiftly to this shifting inflationary landscape, with the probability of a Federal Reserve rate hike in September climbing above 50%. This repricing of policy expectations has cooled the outlook for near-term rate cuts, as traders adjust their baseline scenarios. On Monday, S&P 500 futures rose by approximately 22 basis points ahead of trading, reflecting a relatively calm but recalibrated market sentiment in response to the new data.

To quantify the extent of this inflationary spread, Rindels employed a custom scale ranging from 0 to 10, where 0 represents the average inflation breadth from 1990 to 2019 and 10 corresponds to the peak inflation levels of 2022. Under this framework, the current weighted inflation breadth registers at 6, while the unweighted measure stands at only 2. These figures indicate that while inflation is more pervasive than in the pre-pandemic era, it has not yet reached the extreme, economy-wide saturation seen during the height of the crisis.

The analytical methodology relies on a triple-filter framework applied to PCE data, smoothing short-term volatility through a six-month annualized change rate. The breadth of inflation is then calculated as the proportion of PCE components with price increases exceeding 3%, analyzed through two distinct lenses: weighted by consumption share and unweighted across equal categories. This dual approach allows for a nuanced understanding of whether price pressures are concentrated in high-impact sectors or distributed broadly across the economy.

Per Woofun AI, the weighted reading of 6 implies that, when adjusted for consumer spending patterns, the current extent of inflation spread is approximately 60% of the 2022 peak. This suggests that the sectors driving price increases carry significant weight in the overall consumption basket, thereby exerting a disproportionate influence on the headline inflation metrics despite not affecting every category equally.

Conversely, the unweighted reading of 2 reveals that price increases remain confined to a limited number of categories, rather than spreading uniformly across all sub-sectors. This divergence between the weighted and unweighted measures highlights a structural characteristic of the current inflationary environment: pressures are not evenly distributed but are instead anchored in specific, high-impact areas of the economy.

The sectors contributing most significantly to this weighted inflation breadth include video and audio services, financial services, healthcare, and airfare and transportation. These categories possess high weights within the PCE index, meaning that even modest price increases in these areas can drive up the overall weighted inflation measure. This concentration explains why the weighted reading is substantially higher than the unweighted counterpart, as the inflationary pressure is not diffuse but rather focused on these key service-oriented industries.

Looking ahead, housing inflation is expected to play a diminishing role in the overall inflation picture. Rindels forecasts that rent price increases will fall below 3% by the fourth quarter of this year, thereby reducing their contribution to the breadth of inflation. This anticipated decline in housing costs provides a counterbalance to the rising pressures in other sectors, suggesting that the overall inflationary trajectory may stabilize as housing rents cool.

In the bond market, the yield on US 2-year Treasury bonds has adjusted from near 4.3% to 4.18% on Monday, following Powell’s hawkish remarks. Traders currently assign an 85% probability to interest rates remaining unchanged at the July policy meeting, while the likelihood of a 25 basis point rate hike in September has risen to 52%.

This shift indicates that the market has incorporated the risk of further tightening into its pricing models, reflecting a cautious stance on future monetary policy.

For investors, the core dilemma lies in navigating an environment where inflation breadth has exceeded historical norms without triggering systemic risk, while policy expectations continue to tighten. The key monitoring factor for the second half of the year will be whether housing rents decline as projected, as this variable will significantly influence the Federal Reserve’s next moves and the broader inflation trajectory.