U.S. consumer prices unexpectedly rose in August and core inflation picked up amid rising rent and food costs, prompting the Federal Reserve to make a third hike of interest rates of 75 basis points next Wednesday.
Surprisingly firm inflation readings reported by the Labor Department on Tuesday followed recent data showing resilience in the labor market. Reports suggested that inflation could remain elevated for some time.
Fed Chairman Jerome Powell reiterated last week that the central bank was “strongly committed” to fighting inflation.
“The renewed rise in core prices for August undermines the weaker headline inflation rate driven by lower gasoline costs,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio.
“This should secure another 75 basis point rate hike at next week’s policy meeting as the Fed continues to take a strong stance against inflation,” he added.
The consumer price index rose 0.1% last month, after being unchanged in July. A 10.6% drop in gasoline values was offset by increases in rents, food and health care.
Food prices advanced 0.8%, and the cost of food consumed at home increased 0.7%. Consumers also paid more for electricity and natural gas.
Economists polled by Reuters had forecast the CPI to fall 0.1%. In the 12 months through August, the CPI rose 8.3%. While this is a slowdown from July’s 8.5% rise, inflation is running well above the Fed’s 2% target.
Beyond the dilemma that the August inflation numbers present for the Fed, they are also a headache for the Joe Biden administration and congressional Democrats hoping to limit their losses in the November midterm elections, projects would change the House of Representatives to Republican hands.
Although the annual CPI peaked at 9.1% in June, the biggest rise since November 1981, it has remained above 8% for six consecutive months. With just one more CPI report before Election Day, it is unlikely to ease before Americans head to the polls.
Gasoline prices in the United States have fallen from an all-time high of more than $5 a gallon in June, according to AAA data. On Tuesday, they averaged $3,707 a gallon.
Fed officials are meeting for their monetary policy meeting next Tuesday and Wednesday. Financial markets have almost priced in a 75 basis point rate hike, according to CME’s FedWatch tool.
The Fed has raised its interest rate twice by three-quarters of a percentage point, in June and July. Since March, it has raised that rate from near zero to its current range of 2.25% to 2.50%.
Last week’s data showed initial jobless claims are at the lowest level in three months and job growth was solid in August. On the last day of July there were two job offers for every unemployed person.
This is supporting the strong increase in wages, contributing to the rise in the prices of services and keeping core inflation high.
Excluding volatile food and energy components, the CPI rose 0.6% in August, after advancing 0.3% in July. Economists had forecast the so-called core CPI to rise 0.3%.
Core inflation was also driven by higher prices for home furnishings and operations, as well as new motor vehicles, motor vehicle insurance and education. But there were declines in the costs of airfares, communications, and used cars and trucks.
The so-called core CPI rose 6.3% in the 12 months to August, after rising 5.9% in July.