U.S. Consumer Inflation Accelerates in August as Gasoline Rebound Strengthens Fed Rate-Hike Case
By Muhammad Irfan — SCN NEWS
WASHINGTON — U.S. consumer prices accelerated in August as gasoline costs rebounded, reinforcing concerns that inflation remains persistent and strengthening financial-market expectations that the Federal Reserve could raise interest rates at its policy meeting next week. The Consumer Price Index rose 0.4% from July after increasing just 0.1% the previous month, the Labor Department said Friday, while prices were 3.4% higher than a year earlier, unchanged from July's annual rate. Both headline readings matched economists' forecasts.
Underlying inflation offered a more complicated picture. Excluding volatile food and energy prices, core CPI increased 0.3% in August after rising 0.2% in July, slightly exceeding the 0.2% monthly increase economists had expected. On a 12-month basis, however, core inflation eased to 2.4% from 2.5%, suggesting that longer-term underlying price growth has continued to moderate even as month-to-month pressures strengthened.
Energy was an important driver of the acceleration. Gasoline prices rebounded after declining for two consecutive months, while renewed Middle East tensions have pushed crude oil back above $100 a barrel and U.S. diesel prices to record levels. AP reported gasoline prices rose 3.9% in August alone, demonstrating how rapidly geopolitical disruptions can move from global energy markets into American household costs.
The inflation problem is not confined to fuel. Prices increased across several consumer categories, including airline fares, hotel rooms, appliances, wireless services and vehicle repairs, while measures of services inflation continued to attract attention from economists. One closely watched measure of services excluding housing accelerated from a 2.8% annual pace in July to 3.0% in August, according to analysts reviewing Friday's report, reinforcing concerns that inflation could prove difficult to return sustainably to the Federal Reserve's target.
The report arrives only days before the Federal Reserve's September 15-16 policy meeting. Financial markets moved rapidly after the release, with traders pricing roughly an 82% probability of a quarter-percentage-point rate increase, compared with about 68% before the CPI data, Reuters reported. Earlier trading briefly pushed expectations still higher as investors digested the combination of consumer inflation, Thursday's producer-price data and a relatively strong August employment report.
Federal Reserve Chair Kevin Warsh has said policymakers need confidence that inflation is returning toward the central bank's 2% objective. The Fed formally targets inflation using the Personal Consumption Expenditures price index rather than CPI, making the forthcoming August PCE report another crucial data point. Economists cited by Reuters currently estimate annual core PCE inflation around 3.2% to 3.3%, after 3.3% in July.
The latest numbers also expose an unusual collision between monetary policy, energy geopolitics and trade policy. Economists have pointed to import tariffs, including measures affecting Canadian goods, as another source of price pressure, while disruption around the Strait of Hormuz and Bab el-Mandeb has increased energy and shipping risks. Brent crude remained above $100 on Friday despite retreating from its recent peak, leaving households and businesses exposed to further fuel and transportation-cost increases.
Financial markets nevertheless initially absorbed the CPI report without the sharp selloff some investors had feared. The S&P 500 and Nasdaq rose after the release, while the benchmark 10-year Treasury yield retreated after earlier approaching 5%. Investors appeared to take some comfort from the headline CPI matching forecasts even though the core monthly reading was somewhat stronger than expected.
The greater risk lies ahead. August's CPI survey largely predates the latest surge in energy prices generated by escalating Middle East tensions, meaning the full impact of crude above $100 and record diesel costs may not yet be visible in consumer inflation data. If energy and transportation costs remain elevated, the Federal Reserve could confront an increasingly difficult trade-off between restraining inflation and avoiding excessive pressure on economic growth.