US Inflation Surges in August, Core Inflation Shows Stability

(CTN News) – For the second month, rising petrol costs drove up US inflation in August. However, the Bureau of Labour Statistics said on Wednesday that core inflation, which excludes the more variable costs of food and energy, has continued to decline.

Inflation was measured by a 3.7% year-over-year increase in the Consumer Price Index in August, up from July’s 3.2% increase. That’s warmer than the 3.6% yearly pace that Refinitiv forecasted from economists. August’s price increase of 0.6% contrasted favorably to July’s 0.2% price increase.

As a result of the Federal Reserve’s 11 rate hikes, core inflation dropped to 4.3% from 4.7% for the 12 months ending in August, the smallest pace since September 2021. In August, core inflation increased by 0.3% month-over-month, marking a notable uptick for the first time since February. The Federal Reserve now pays more attention to the rate of core inflation.

The inflation report released on Wednesday is consistent with the Fed holding off on rate hikes at their upcoming meeting to discuss monetary policy.

The Dow rose 0.1%, the S&P 500 gained 0.2%, and the Nasdaq Composite gained 0.4% after August’s CPI data announced, indicating a small increase in US stocks.

More than half of the acceleration in the CPI in August can be attributed to the rise in petrol costs. The petrol component of the CPI surged 10.6% in August, compared to a mere 0.2% increase in the previous month.

In August, the petrol component of the overall energy index rose 5.6% from the previous month. Housing inflation has been on the rise for some time now.

“Overall inflation has also fallen substantially over the last year, but I know last month’s increase in petrol prices put a strain on family budgets,” Vice President Joe Biden said in a statement on Wednesday, referencing the recent increase in petrol prices. That’s why I’m so determined to keep energy costs low, especially by increasing our energy security through investments in renewable sources.

Oil prices worldwide have risen as OPEC+ countries have reduced output to meet surging demand. Oil exports were halted this week after a devastating flood in Libya, which will lead to higher petrol prices.

On Wednesday, the average price of ordinary petrol across the country hit $3.85, the highest price in 10 months, as reported by AAA. Higher petrol costs are a clear sign of inflation, which could dampen the spirits of American consumers.

Economists do not believe the recent volatility in energy prices will curb inflation in the coming months.

Sarah House, senior economist at Wells Fargo, said in an interview with CNN that the impact of rising energy prices on consumers’ ability to pay for essentials like food and housing is minimal.

She said, “If energy price increases persist, they could trickle down into the core, making it more difficult for the Fed to return inflation to its 2% target on a sustained basis.” However, she predicted that this dynamic would be “overwhelmed” by the ongoing unwinding of supply and even demand distortions that have been present since the pandemic.

Due to various reasons predicted to help inflation’s decline, such as weaker consumer spending and a cooling US job market, the Fed is still widely expected to leave rates constant next week, while an additional rate hike beyond September remains possible.

An analyst note from Glenmede’s chief investment strategist and researcher, Jason Pride, stated that “today’s inflation report likely does not move the needle much for the [central bank’s policy committee] ahead of its session next week — no rate hike remains the base case, especially given the considerable tightening that has yet to completely work its way through the economy.”

“However, the pickup in inflation may increase the likelihood of additional tightening before year’s end, as putting the inflation genie back in the bottle does not appear as straightforward as some would have hoped.”

According to the CME FedWatch Tool, the financial markets are pricing in a 97% chance of a pause and a 58% possibility of another pause in November.

Inflation slows to the Fed’s 2% target without a substantial rise in unemployment or a recession; this is the so-called “soft landing” scenario that Fed officials still hope to achieve.

Since reaching its highest point in four decades in June 2022, inflation in the United States, as measured by the Consumer Price Index, has progressively decreased as the economy and the employment market have remained stable. That’s despite the Federal Reserve’s biggest push for rate increases since the 1980s.

The Fed may reduce economic activity, but it’s hard to say how much or when. According to a recent report by the Chicago Fed, the present interest rate level is sufficient to bring inflation back down to 2% by mid-2024 without causing a recession.

However, other economists believe the Fed still has room to increase interest rates.

Last Monday, Federal Reserve Bank of Dallas President Lorie Logan indicated, “Another skip could be appropriate when we meet later this month.”

However, skipping does not always mean quitting. More analysis of the statistics and outlook in the coming months may show that we need to take additional steps to combat inflation.

Despite the risk of fluctuating energy prices, inflation is anticipated to ease for the remainder of 2018.

“Looking ahead, easing demand for goods and services, the pass-through from softer home and rent price inflation, and cooling wage growth should lead to further disinflation,” noted EY-Parthenon’s chief Economist Gregory Daco.

The CPI component that most directly affects housing expenses saw its smallest month-over-month increase (0.3%) since January 2022 in August. According to a recent report from the San Francisco Fed, negative shelter inflation could occur in the second half of 2024. A lower CPI would result from such.

Inflation may lose some of its momenta in the coming months as the US labor market is forecast to soften.

To effectively combat inflation, Federal Reserve Chair Jerome Powell has stated that the central bank must “come into better balance” in the labor market.

In the current US labour market, there are millions of open positions but not nearly as many people looking for work. This mismatch contributes to price inflation since firms must pay higher rates to attract and retain workers.