The Bureau of Labor Statistics released the CPI report for August which showed a 3.7% increase in inflation which was above expectations of 3.6%. Core CPI came in at 4.3% which was in line with expectations.

It marks the third straight monthly increase in inflation as July saw CPI at 3.2%. Some of the factors contributing to this were a 5.6% increase in energy prices and a 7.3% increase in owners-equivalent rent. 

Initially, Treasuries weakened on the news as it incrementally increased the odds of another hike by the Federal Reserve. However, the fixed income complex was quickly bid up on the drop as market participants seem willing to look past the hotter than expected inflation data.

Two major components of the inflation report - housing and wages - are softening which spells relief for the market. Rents are already dropping in key markets, while recent labor market data shows that unemployment is ticking higher. Much of this data will take time to be reflected in the CPI. Thus, investors are willing to use the weakness to add to fixed income. 

Finsum: Fixed income was bid up despite a hotter than expected CPI report. This seems to be because investors are increasingly confident that inflationary pressures will continue to recede.