Federal Report Clocks August Inflation Uptick

Inflation Illustration
Inflation Illustration | Image by Deemerwha studio/Shutterstock

Inflation accelerated in the United States in August, marking the biggest monthly increase in over a year and sending mixed signals over the possibility of another Fed interest rate hike later this month.

The Consumer Price Index (CPI), which measures the price fluctuations of a broad basket of goods and services in the United States, rose by a seasonally adjusted 0.6% last month and 3.7% over the last 12 months, the U.S. Department of Labor reported Wednesday.

The index for gasoline was the largest contributor, accounting for over 50% of the monthly increase, the Labor Department said. Other indexes that contributed to the increase in August include the energy index, which jumped by 5.6%, and the shelter index, which rose for the 40th consecutive month.

With consumer prices still rising and headline inflation moving further away from the 2% target, the Federal Reserve may have to continue its tightening cycle, according to Jason Schenker, president of Prestige Economics.

“The inflation genie is not yet back in the bottle,” said Schenker, USA Today reported.

Core CPI, which strips out the volatile food and energy components of consumer spending, rose 0.3% in August following a 0.2% increase in July. Overall, Core CPI has slowed down over the last 12 months, falling to a seasonally adjusted 4.3% in August from 4.7% in July. The energy index decreased by 3.6% during this period, and the food index increased by 4.3%, according to the Labor Department.

The indexes that increased in August include rent (+0.5%), owners’ equivalent rent (+0.4%), motor vehicle insurance (+2.4%), medical care (+0.2%), and personal care (+0.3%). The indexes for lodging away from home (-3.0%), used cars and trucks (-1.2%), and recreation (-0.2%) were among those that decreased during the month, according to the report.

Indexes with notable increases over the last 12 months include shelter (+7.3%), motor vehicle insurance (+19.1%), recreation (+3.5%), personal care (+5.8%), and new vehicles (+2.9%).

“The monthly rate of change in both headline and core CPI measures have moderated nicely in recent months, but some of the usual trouble spots remain — shelter and costs for motor vehicle insurance, maintenance, and repair,” said Greg McBride, chief financial analyst for Bankrate, NBC News reported.

So far, the Federal Reserve has taken a data-dependent approach to its fight against inflation.

However, with the headline reading soaring higher in both July and August and the downward revisions to employment reports in recent months, the economy appears to be losing steam, according to Brian Pietrangelo, senior vice president and managing director of investment strategy at Key Private Bank.

“In our view, the economy maintains decent momentum but is showing signs of slowing, and thus the Federal Reserve is likely to pause next week and wait for additional data to unfold for the November meeting,” Pietrangelo said in a written statement, Yahoo Finance reported.

While Pietrangelo and others predict a rate pause at the upcoming monetary policy meeting on September 19-20, Seema Shah, chief global strategist at Principal Asset Management, warned of at least one more rate hike before the end of the year.

“The inflation print likely is not enough to tilt next week’s Fed call towards a hike, yet it also hasn’t entirely cleared up the question of a November pause vs. hike,” Shah said, per Yahoo Finance.

“The rise in headline should come as no surprise given the recent run-up in energy prices and the Fed will likely look through the number… for now,” she said. “But the general expectation was that core inflation would remain stable, if not decelerate this month, so the upside surprise probably leaves the Fed with a bad taste in its mouth and keeps it wondering if it still has more work to do.”

As of Wednesday at 10:30 a.m., Fed futures show a 97% probability of a pause at the next meeting and only a 3% chance for a 0.25% increase. This would keep the Fed’s target range between 5.25% and 5.50%, according to data from the New York Fed.

The next CPI report is scheduled for release on October 12.

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