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Inflation remained elevated in August even as the pace of consumer price growth from a year ago remains elevated, as the Federal Reserve considers a potential interest rate hike next month.
The Bureau of Labor Statistics (BLS) said on Wednesday that the consumer price index (CPI) – a broad measure of how much everyday goods like gasoline, groceries and rent cost – increased 0.4% on a monthly basis and is up 3.4% from a year ago.
Expectations vs. reality
Those figures were in line with the estimates of economists polled by LSEG. The monthly data follows a reading of 0.1% in July, while the annual figure is unchanged from last month’s reading.
So-called core prices, which exclude volatile measurements of gasoline and groceries to better assess price growth trends, were up 0.3% from a month ago and are 2.4% higher year over year. The monthly figure was slightly hotter than the LSEG estimate, while the annual figure was in line with expectations.
The monthly core figure represents a slight uptick after price growth was up 0.2% in July, while the annual figure is slightly cooler than last month’s 2.5% reading.
INFLATION COOLED IN JULY BUT REMAINED ELEVATED AS FED WEIGHS RATE HIKES
The cost of living breakdown
High inflation has created severe financial pressures in recent years for most U.S. households, which are forced to pay more for everyday necessities like food and rent. Price hikes are particularly difficult for lower-income Americans, because they tend to spend more of their already-stretched paychecks on necessities and have less flexibility to save.
Energy prices rose 2.1% on a monthly basis in August and increased 16.3% higher than a year ago. The increase comes after the monthly figure fell 5.7% in June and 1.5% in July.
Gasoline prices increased 3.9% in the month of August and rose 27.4% on an annual basis. Electricity costs decreased 0.2% on a monthly basis and are up 3.8% compared with last year. BLS noted the gasoline index accounted for more than one-third of the headline CPI increase.
Food prices ticked higher by 0.1% on a monthly basis and increased 2.7% compared with last year. The food at home index was unchanged from the prior month and is up 2.2% on an annual basis. The food away from home index rose 0.3% in August and is up 3.4% from a year ago.
The meats, poultry and fish index declined 0.1% from the prior month and is 3.5% higher than a year ago. Beef and veal prices declined 1% in August but are 5.9% higher than a year ago. Egg prices rose 2.9% on a monthly basis and are down 23% from a year ago as supply normalizes after an avian flu outbreak.
The fruits and vegetables index decreased 0.4% on a monthly basis in August and is up 3.2% compared with a year ago. Lettuce prices fell 6.2% on a monthly basis amid a cyclospora outbreak and the index is down 2.2% on an annual basis.
WARSH SAYS FED’S MAIN FOCUS SHOULD BE ON PRICES WITH CENTRAL BANK’S RATE POLICY IN FOCUS
Housing prices rose 0.3% in August while the shelter index is 3% higher than a year ago. Tenants’ and household insurance costs were unchanged on a monthly basis but are up 4.1% compared with last year.
Transportation services prices increased 0.5% on a monthly basis and are up 2.4% from last year. Airline fares rose 2.7% in August and are up 23.4% compared with a year ago amid higher jet fuel costs.
What experts are saying
“Today’s CPI came in broadly as expected, which on the surface is the outcome investors were hoping for, but it does make next week’s rate decision a jump ball,” said Alexandra Wilson-Elizondo, global head and co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management.
“The challenge is that the data does not fully capture some of the inflation pressures that have emerged more recently, and there is little evidence to suggest inflation is returning to target in the near-term. The survey period predates the latest move higher in energy prices, with Brent crude climbing above $100 as tensions around the Strait of Hormuz persist,” Wilson-Elizondo added.
WHAT WARSH’S JACKSON HOLE SPEECH SIGNALS ABOUT WHERE INTEREST RATES ARE HEADED
Heather Long, chief economist at Navy Federal Credit Union, said that “America has an inflation problem and it’s more than just high gas and diesel prices. The August inflation data came in hotter than expected, especially the ‘core inflation’ that strips out food and energy costs.”
“Fed Chair Kevin Warsh says he’s watching how broad-based the inflation problem is. And right now, it’s a wide problem. Restaurants, new and used vehicles, shelter and transportation all had sizable gains in August. The Federal Reserve needs to hike in September to prevent this from worsening,” Long said.
What does it mean for the Fed and interest rates?
The August inflation data boosted the odds of the Federal Reserve hiking interest rates next week from the current target range of 3.5% to 3.75%.
The CME FedWatch tool shows the market now reflects an 85.6% chance of a 25 basis point rate hike, up from 72.4% a day ago and 59.4% last week.
What does it mean for the stock market?
The benchmark S&P 500 Index was 0.91% higher in the morning’s trading session.
The Dow Jones Industrial Average was up about 0.96%, while the Nasdaq Composite Index was up 0.98%.
