U.S. August CPI rises 0.4%, boosting odds of Fed rate hike
Consumer prices increased 0.4% in August, driven by higher energy costs, while core inflation also rose, prompting markets to expect a Federal Reserve rate increase next week.
U.S. consumer prices rose 0.4% in August, matching economists' forecasts and marking a faster monthly gain than July's 0.1% increase, the Labor Department reported on Friday. The year-over-year CPI rose 3.4%, unchanged from the previous month, as gasoline prices jumped 3.9% and other motor fuels surged 9.6%.
Core CPI, which excludes food and energy, climbed 0.3% – the biggest rise since April – and was above the 0.2% gain analysts had anticipated. On a 12-month basis, core CPI advanced 2.4%, while core PCE inflation is expected to increase 0.3% in the upcoming report.
Energy price pressures extended beyond the pump, with crude oil trading above $100 a barrel and diesel exceeding $6 a gallon for the first time. "Energy inflation does not stay at the gas station. It travels by truck, airplane and cargo ship into nearly every store in America," said Sung Won Sohn, a finance professor at Loyola Marymount University, adding that the Fed is likely to raise its policy rate.
Food costs showed modest movement, with overall grocery prices flat and fruit and vegetable prices falling 0.4% amid a lettuce price drop linked to a Cyclospora outbreak. However, egg prices rose 2.9% and dairy products became more expensive, pushing the year-over-year food price index to 2.7%.
The stronger inflation readings, combined with signs of a stabilising labor market, have increased market expectations that the Federal Reserve will lift its benchmark rate, currently set at 3.50%-3.75%, at its meeting on Tuesday and Wednesday. CME's FedWatch tool showed the probability of a 25-basis-point hike rising to 87% from 72% on Thursday.
Analysts also noted that inflation-adjusted hourly earnings fell 0.3% in August, marking the fifth consecutive month of wage contraction. "Inflation-adjusted wage growth contracted for a fifth consecutive month in August," said Gregory Daco, chief economist at EY-Parthenon.
Financial markets reacted with mixed moves: Wall Street stocks gained as oil prices retreated, the dollar remained steady, and Treasury yields eased after an initial rise. The broader economic backdrop includes ongoing geopolitical tensions and a potential AI-driven demand surge, factors that could influence future price dynamics.