Inflation showed little sign of cooling in August, as consumer prices climbed 3.4% from the same month a year ago. The annual pace was unchanged from July, but it landed slightly above Wall Street expectations, with elevated gasoline prices continuing to put pressure on household budgets.
The firmer-than-anticipated inflation reading strengthened expectations that the Federal Reserve could move ahead with its first interest rate increase in more than three years when policymakers meet next week, analysts said Friday.
By the numbers
Economists surveyed by FactSet had projected that annual inflation would come in at 3.3% for August.
The Consumer Price Index, or CPI, measures the changing cost of a broad mix of goods and services commonly purchased by consumers.
While inflation has eased since reaching a three-year peak in May, it remains far above the Federal Reserve’s 2% target, largely because energy costs have stayed elevated amid the Iran war.
According to the Labor Department’s Friday report, gasoline was responsible for more than one-third of the monthly increase in the CPI. Prices at the pump are now 27.4% higher than a year earlier, including a 3.9% rise from July to August.
Core CPI, which strips out the often-volatile food and energy categories, increased 2.4% on an annual basis. That matched economists’ forecasts and marked a slight slowdown from 2.5% in July.
On a month-to-month basis, however, core inflation rose 0.3%, topping expectations and picking up from the 0.2% increase recorded in July.
Federal Reserve officials are expected to scrutinize the core CPI figures closely for signs that higher energy costs tied to the Iran war are beginning to spread into other parts of the economy.
What it means for the Fed
The closely watched August CPI report could play a major role in shaping the Federal Reserve’s next interest rate decision, scheduled for Wednesday, Sept. 16. Fed Chairman Kevin Warsh signaled during a speech last month in Jackson Hole that controlling inflation remains the central bank’s top priority, warning that policymakers will “have work to do” if price pressures fail to ease.
Following the release of the inflation data Friday morning, the probability of a rate hike next week rose sharply to 90%, up from 70% on Thursday, according to CME FedWatch, which tracks expectations through 30-day Fed funds futures pricing.
Energy markets have remained under strain in recent weeks as fighting in the Iran war, has intensified. Diesel prices reached a painful new milestone of $6 a gallon on Thursday, a development that could have broader consequences because diesel fuels the trucks and rail systems that move goods across the U.S. If transportation costs keep rising, businesses may pass those expenses on to consumers through higher prices.
The national average for a gallon of diesel rose to a record $6.06 on Friday, up more than 60% from $3.71 a year ago, according to data from AAA.
The price of gasoline has also continued its recent rapid rise as well, hitting a national average of $4.30 a gallon on Friday, AAA reported. The August data doesn’t reflect the recent surge in gas and diesel prices, experts said on Friday.
“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,” said Alexandra Wilson-Elizondo, global head and co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management, in a Friday email.
She added, “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.”
Aimee Picchi
