- Consumer price index rises 0.1% in August
- Rent, groceries and health care contribute to the increase in the CPI
- Core CPI up 0.6%; 6.3% more than in the previous year
WASHINGTON, Sept 13 (Reuters) – US consumer prices rose unexpectedly in August and underlying inflation accelerated amid rising rent and healthcare costs, giving the Federal Reserve ammunition for a third 75 basis point rate hike next Wednesday.
The surprisingly firm inflation readings reported by the Labor Department on Tuesday came despite an easing in global supply chains that helped push prices higher earlier in the year. With a resilient labor market supporting strong wage growth, inflation is unlikely to have peaked yet, keeping the Fed on an aggressive monetary stance for a while.
“The Fed is almost certain to hike rates aggressively next week, likely by 75 basis points, while strongly resisting talk of a near-term pause in the tightening cycle,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto.
Sign up now for FREE unlimited access to Reuters.com
The consumer price index rose 0.1% last month after remaining flat in July. Although consumers got some relief from a 10.6% drop in gasoline prices, they had to dig deeper to pay for groceries, rent, health care, electricity and natural gas.
Grocery prices rose 0.8%, with the cost of groceries eaten at home rising 0.7%. Food prices rose 11.4% last year, the biggest 12-month rise since May 1979.
Economists polled by Reuters had forecast the CPI to fall 0.1%. In the 12 months to August, the CPI rose 8.3%. That was a deceleration from the 8.5% rise in July and a 9.1% rise in June, the largest rise since November 1981. Inflation exceeded the Fed’s target of 2%.
Aside from the dilemma August’s inflation numbers pose for the US Federal Reserve, they’re also a headache for the Biden administration and Congressional Democrats hoping to limit their losses in the Nov. 8 midterm elections, which are expected to clear the House of Representatives will turn representatives into Republican hands. Annual CPI has stayed above 8% for six straight months.
President Joe Biden on Tuesday said it will take “more time and determination to bring inflation down,” citing the recently passed Inflation Reduction Act, which aims to reduce health care, prescription drug and energy costs, as the White House steps to ease the burden on Americans of higher prices.
Fed officials have their regular policy meeting next Tuesday and Wednesday. Financial markets have priced in a 75 basis point rate hike next Wednesday, with the potential for a full percentage point, according to CME’s FedWatch Tool.
Wall Street stocks fell, ending a four-day winning streak. The dollar rallied against a basket of currencies. US Treasury bond prices rose.
BEHIND THE CURVE
“It is becoming increasingly clear to market participants that the Fed’s tightening to date has not been enough to cool the economy and lower inflation,” said Charlie Ripley, senior investment strategist at Allianz Investment Management in Minneapolis, Minnesota.
Fed Chair Jerome Powell reiterated last week that the central bank was “strong” on fighting inflation. The Fed raised its key interest rate twice in June and July by three-quarters of a percentage point. Since March, it has raised that rate from near zero to its current range of 2.25%-2.50%.
Some of the price pressure is coming from the labor market, where the Fed is trying to dampen demand for workers.
Last week’s data showed that initial jobless claims were at a three-month low. Job growth was solid in August and on the last day of July there were two vacancies for every unemployed person.
This supports strong wage growth, contributes to higher service prices and keeps underlying inflation high.
Excluding the volatile food and energy components, CPI rose 0.6% in August after rising 0.3% in July. Economists had forecast that the so-called core CPI would rise by 0.3%.
The owner-equivalent rent, a measure of the amount homeowners would pay to rent or earn from renting out their property, rose 0.7%. It rose 6.3% year-on-year, the sharpest rise since April 1986. Rents are volatile and make up a significant portion of the CPI basket, meaning inflation will remain high for some time to come.
Higher mortgage rates and house prices reduce affordability for many first-time buyers and boost demand for rental housing. A possible strike by railroad workers, which could paralyze the American rail system and hamper the movement of goods as early as Friday, could fuel the inflationary fires.
“While private sector rental growth measures suggest corresponding CPI categories may be close to peaking on a monthly basis, the slowness of primary rent and OER in the CPI data suggests that residential construction continues to provide a significant boost for which will provide core inflation for the coming months,” said Sarah House, senior economist at Wells Fargo in Charlotte, North Carolina.
Underlying inflation was also driven by higher prices for household equipment and utilities, as well as car insurance and education. New car prices increased by 0.8%. But there have been declines in the cost of airline tickets, communications, and used cars and trucks. The prices for hotel and motel rooms remained unchanged.
Healthcare costs rose 0.7%, hospital service prices rose 0.7% and prescription drug prices rose 0.4%. In the 12 months to August, core CPI rose 6.3% after rising 5.9% in July.
“Wages and housing costs will remain the main drivers of future inflation,” said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles. “There is no noteworthy pause in inflation in sight.”
Sign up now for FREE unlimited access to Reuters.com
Reporting by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci
Our standards: The Thomson Reuters Trust Principles.
Comments are closed.