August Inflation Holds at 3.4% as Fuel Costs Rise
Wertynews.com – Inflation stayed hot in August, with the Consumer Price Index rising 3.4% from a year earlier. The annual increase matched July’s pace and came in slightly above economists’ expectation of a 3.3% gain, adding pressure on the Federal Reserve ahead of its next policy decision.
While inflation has eased from the three-year high reached in May, elevated energy prices remain a hurdle for the Fed’s 2% target. The August report showed that price pressures were still broad enough to keep a possible interest-rate increase firmly in focus.
Gasoline led the monthly CPI increase
Gasoline accounted for more than one-third of the monthly rise in the CPI. Fuel prices jumped 3.9% in August and were 27.4% higher than a year earlier, increasing costs for drivers and placing added strain on household budgets.
The CPI tracks price changes for a wide range of goods and services purchased by consumers. Its latest reading indicates that, despite improvement in some categories, the overall cost of living remains high.
Core CPI, which excludes food and energy prices, rose 2.4% from a year earlier. That result matched expectations and slowed from July’s 2.5% annual increase. However, core prices rose 0.3% during August, faster than the 0.2% gain recorded in July and above forecasts.
Fed rate expectations increased after the report
Inflation stayed hot in August just days before the Federal Reserve’s scheduled decision on Wednesday, Sept. 16. Following the report, CME FedWatch showed the market-implied probability of an interest-rate increase rising to 90%, up from 70% the previous day.
A rate hike would be the Fed’s first in more than three years. Higher interest rates are designed to slow demand and reduce inflation, but they can also raise borrowing costs for mortgages, auto loans, credit cards and other variable-rate debt.
Fed Chairman Kevin Warsh said at Jackson Hole last month that price stability remains the central bank’s priority. Adam Crisafulli of Vital Knowledge said the report was “still hot” and offered “more than enough to justify” a Fed rate hike this month.
Energy prices could add to future inflation pressure
The August data may not capture the full effect of the fuel-price increases that followed the survey period. Diesel reached $6 a gallon on Thursday, a significant development because the fuel is widely used to transport goods by truck and rail.
AAA reported that the national average diesel price reached a record $6.06 a gallon on Friday, more than 60% above the $3.71 level a year earlier. Regular gasoline rose to a nationwide average of $4.30 a gallon.
Hostilities surrounding the Iran war have added to energy-market uncertainty. Brent crude moved above $100 as tensions around the Strait of Hormuz continued, raising concern that higher transport and delivery costs could eventually push up prices for consumers.
“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.”
Alexandra Wilson-Elizondo, global head and co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management, said the timing of the August survey left part of the recent energy shock outside the report.
FAQ: What the August Inflation Report Means
Why did inflation remain elevated in August?
Gasoline was a major factor, accounting for more than one-third of the monthly CPI increase. Higher energy costs can also affect shipping, delivery and business expenses, potentially influencing prices beyond the fuel pump.
What does inflation stayed hot in August mean for interest rates?
The report strengthened expectations that the Federal Reserve could raise rates at its Sept. 16 meeting. Policymakers will weigh the inflation data against the risk that higher borrowing costs could slow the economy.
How could higher rates affect households?
Consumers may face higher costs on new mortgages, auto loans, credit-card balances and other loans with variable rates. Savings accounts and some other interest-bearing deposits may also offer higher returns.