In a notable uptick, US consumer prices experienced their most significant increase in over a year during August, primarily propelled by a surge in petrol costs. However, a more moderate rise in underlying inflation may provide the Federal Reserve with reasons to consider keeping interest rates unchanged in its upcoming decision next Wednesday.
The latest report from the labor department revealed that the Consumer Price Index (CPI) rose by 0.6% last month, marking the most substantial gain since June 2022. This followed two consecutive months of a 0.2% increase in the CPI. The spotlight was on petrol prices, which accelerated in August, reaching a peak of $3.984 per gallon in the third week of the month, as reported by the US Energy Information Administration. This was a notable increase from the $3.676 per gallon observed during the same period in July.
Over the 12-month period through August, the CPI surged by 3.7%, following a 3.2% climb in July. While this indicated the second consecutive month of annual inflation picking up, it’s important to note that year-on-year consumer prices have receded from their peak of 9.1% in June 2022. The Federal Reserve maintains a 2% inflation target.
Economists surveyed by Reuters had anticipated a 0.6% increase in the CPI for last month, with a year-on-year advance of 3.6%. This report comes just a week ahead of the Fed’s rate decision and follows data earlier this month indicating a slowdown in labor market conditions in August.
Excluding the volatile food and energy components, the so-called core CPI saw a 0.3% increase in August, driven by declining prices for used cars and trucks. This core CPI had previously risen by 0.2% for two consecutive months. While rents continued to rise, there is a noticeable cooling trend, and further deceleration is expected with more apartment buildings entering the market.
Over the 12 months through August, the core CPI increased by 4.3%, marking the smallest year-on-year rise since September 2021, following a 4.7% gain in July.
Financial markets appear to overwhelmingly expect the Fed to leave its policy rate unchanged next week, as indicated by CME Group’s FedWatch tool. Since March 2022, the US central bank has increased its benchmark overnight interest rate by 525 basis points, reaching the current range of 5.25%-5.50%.
However, the possibility of a rate hike in November remains on the table, especially as services inflation, excluding shelter, continues to remain elevated. Some economists believe that inflation risks are skewed to the upside, citing rising insurance costs, particularly for motor vehicles. Health insurance costs in the CPI report are anticipated to rise from October through the coming spring following changes to the methodology for measuring these costs announced by the Labor Department’s Bureau of Labor Statistics.
A strike in the automobile sector could disrupt supply chains and lead to higher motor vehicle prices if it extends beyond a month, economists have noted. United Auto Workers members recently voted overwhelmingly in favor of authorizing a work stoppage at General Motors, Ford Motor, and Stellantis if wage and pension plan negotiations do not yield an agreement before the current four-year contract expires on September 14.
