A higher-than-expected U.S. inflation rate in August put pressure on the Federal Reserve for a major interest rate hike this month and triggered a sharp sell-off on Wall Street.
The consumer price index rose 0.1% on the month, beating economists’ expectations for a 0.1% decline, as falling energy costs failed to fully offset the increase in services and utilities. Other spending items
The figures released by the Bureau of Labor Statistics also contrast with July, when prices were flat from the previous month.
On an annualized basis, key inflation is sitting at 8.3%, down from 8.5% in July, but still near a four-decade high. Economists expect a reading rate of 8.1%.
Wall Street was caught off guard by hotter-than-expected inflation data. The S&P 500 index fell as much as 2.7% in the first hour of trading on Tuesday. The Nasdaq Composite, along with technology companies that are more sensitive to changes in interest rate expectations, fell 3.3%.
In the government debt market, the yield on the 2-year US Treasury, which is more sensitive to policy expectations, rose 0.16 percentage points to 3.73%, trading at 3.52% before the release of inflation data.
“We don’t really see anything that would make the Fed want to choose a slower rate hike this month,” said Brian Coulton, chief economist at Fitch Ratings.
The surprising jump has occurred despite the drop in gasoline prices in recent months. Earlier this summer, they topped a record $5/gallon in early summer after oil prices skyrocketed following Russia’s all-out invasion of Ukraine. According to the American Automobile Association, the current national average is $3.70.
However, once energy and food prices are eliminated, the core consumer price index (CPI) will increase further. From July to August, it increased by 0.6%, representing an annual increase of 6.3%. This is up from 5.9% recorded in the previous period.
The latest CPI report is the last big data release ahead of the US central bank’s next policy meeting, whereby officials are expected to deliver a 0.75 percentage point rate hike. third time in a row.
That would raise the federal funds rate to a new target range of 3% to 3.25%. By the end of the year, futures markets suggest the benchmark policy rate will be between 3.75% and 4%.
Gasoline prices fell 10.6% in August, leading to a 5% drop in energy prices in general. Airline fares fell 4.6%, after falling 7.8% in July, while used car prices also fell.
However, a 0.7% increase in accommodation-related costs countered that drop. Compared to last year, they are up 6.2%. Food prices rose 0.8%, following July’s 1.1% gain, representing an annualized increase of 11.4%.
Due to higher prices in the transportation services as well as medical care sectors, external services inflation rose 0.6 percent, or 6.1 percent, year-on-year.
In recent weeks, Fed policymakers have reaffirm their commitment to control inflation, highlighting the risks involved in allowing price pressures to linger.
Chairman Jay Powell and Vice Chairman Lael Brainard cannot bring down inflation, and letting future price increases expect more economic gains. warning last week.
Since gasoline prices have fallen, there are also expectations for future inflation. Data release Fed’s New York branch on Monday showed households now expect inflation to settle at 5.7% in a year, down from 6.2%.
However, policymakers fear this downward trend will not be sustained, especially if energy prices soar later this year. Finance Minister Janet Yellen warned of that possibility over the weekend, citing concerns about widespread shortages across Europe as the bloc stops buying oil from Russia.
Christopher Waller, a governor who sits on the Federal Open Market Committee, say on friday that he supported “another substantial increase” to the benchmark policy rate at the September meeting. He noted that the resilience of the US economy and the strength of the labor market have delivered. giving the Fed “flexibility to be aggressive” in the fight against inflation.
US President Joe Biden is scheduled to hold an event at the White House on Tuesday afternoon to celebrate the passage of the Inflation Reduction Act – a package of measures passed by Congress in August that includes the incentives for clean energy and some higher taxes for the rich and big. companies. While economists do not believe the law will have an immediate impact on inflation, it could ease price pressures in the long run.
High inflation has hampered the economic recovery for months, giving Republicans an edge as they head into the November midterm elections.