The surprisingly steady reading of inflation reported by the Labor Department on Tuesday was despite a loosening of global supply chains that had helped prices rise earlier in the year. With a resilient labor market supporting strong wage growth, inflation likely hasn’t peaked, keeping the Fed on an aggressive monetary policy path for a while. “The Fed is certain to raise interest rates aggressively next week, likely by 75 basis points, while pushing hard on talk of a short-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.comSign up The consumer price index rose 0.1% last month after remaining unchanged in July. Although consumers got some relief from the 10.6% drop in gasoline prices, they had to dig deeper to pay for food, rent, health care, electricity and gas. Food prices rose 0.8%, with the cost of food consumed at home rising 0.7%. Food prices rose 11.4% over the past year, the biggest 12-month increase since May 1979. Economists polled by Reuters had expected the CPI to fall 0.1 percent. In the 12 months to August, the CPI rose 8.3%. That was a slowdown from July’s 8.5% rise and June’s 9.1% jump, which was the biggest gain since November 1981. Inflation has exceeded the Fed’s 2% target. Beyond the dilemma August inflation numbers present to the U.S. central bank, they are 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 overturn House of representatives in the hands of the Republicans. The annual CPI has remained above 8% for six consecutive months. President Joe Biden said on Tuesday that “it will take more time and determination to bring inflation down” and cited the recently passed Inflation Reduction Act aimed at reducing health care, prescription drug and energy costs as measures received by the White House to ease the burden of higher prices for Americans. Fed officials gather next Tuesday and Wednesday for their regular policy meeting. Financial markets have priced in a rate hike of 75 basis points next Wednesday, with the possibility of 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 bond prices rose.
BEHIND THE CURVE
A person shops at a supermarket as inflation hit consumer prices in Manhattan, New York, U.S., June 10, 2022. REUTERS/Andrew Kelly read more “It’s becoming more apparent to market participants that the amount of tightening by the Fed so far has not been enough to cool the economy and reduce inflation,” said Charlie Ripley, senior investment strategist at Allianz Investment Management in Minneapolis, Minnesota. Fed Chairman Jerome Powell reiterated last week that the central bank is “strongly committed” to fighting inflation. The Fed raised its policy rate twice by three-quarters of a percentage point, in June and July. Since March, it has raised that rate from near zero to the current range of 2.25% to 2.50%. Some of the pressure on prices comes from the labor market, where the Fed is trying to reduce demand for workers. Last week’s data showed first-time jobless claims at a three-month low. Job growth was flat in August and there were two jobs for every jobless on the last day of July. This supports strong wage gains, contributes to higher prices for services and keeps underlying inflation high. Excluding volatile food and energy components, the CPI rose 0.6% in August after rising 0.3% in July. Economists had forecast the so-called core CPI to rise 0.3%. Landlord equivalent rent, a measure of how much homeowners would pay to rent or earn from renting out their property, rose 0.7%. It jumped 6.3% year-on-year, the biggest increase since April 1986. Rents are steady and represent a significant share of the CPI basket, meaning inflation will remain high for some time. Higher mortgage rates and house prices are reducing affordability for many first-time buyers, increasing demand for rental accommodation. A possible strike by railroad workers, which could shut down the US rail system and block the movement of freight as early as Friday, could fuel the fires of inflation. “While measures of private sector rent growth suggest that the respective CPI categories may be nearing their peak on a monthly basis, the sluggish nature of primary rent and GDP in the CPI data suggest that housing will continue to provide a significant boost to core of inflation in the coming months,” said Sarah House, senior economist at Wells Fargo in Charlotte, North Carolina. Underlying inflation was also driven by higher prices for furniture and housework, as well as motor vehicle insurance and training. Prices of new motor vehicles rose 0.8%. However, there were reductions in the cost of air fares, communication and used cars and trucks. Prices for hotel and motel rooms remained unchanged. Health care costs rose 0.7%, with prices for hospital services rising 0.7% and prescription drugs rising 0.4%. In the 12 months to August, the 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, professor of economics and finance at Loyola Marymount University in Los Angeles. “No significant inflation relief in sight.” Sign up now for FREE unlimited access to Reuters.comSign up Reported by Lucia Mutikani. Edited by Chizu Nomiyama and Andrea Ricci Our Standards: The Thomson Reuters Trust Principles.
