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Rising energy costs pushed US inflation above forecasts in August, complicating the Federal Reserve’s battle to control prices.
According to figures released by the Bureau of Labor Statistics on Wednesday, consumer prices rose by 3.7% year on year, surpassing the consensus forecast of 3.6%. On a monthly basis, prices increased by 0.6%.
Although underlying price pressures were also slightly stronger than expected, they continued to decline year on year.
More than half of the monthly increase in price pressures was due to a recent surge in petrol prices. Saudi Arabia and Russia are working to raise the price of oil to $100 a barrel, with Brent crude already reaching a 10-month high of about $92.50.
The market response was muted, with the yield on the two-year Treasury remaining flat and the S&P 500 stock index dipping 0.2%.
Roosevelt Bowman, senior investment strategist at Bernstein Private Wealth Management, predicted that the Federal Reserve will largely ignore short-term energy spikes when determining monetary policy. However, he emphasized the need for vigilance if the increases persist.
Policymakers typically focus on core inflation, which excludes volatile food and energy prices, but a higher headline figure can impact consumer behavior and expectations of future price increases.
Core inflation rose by 0.3% month on month, slightly higher than July’s rate of 0.2%, driven by rising prices for airfares, car rental, and motor insurance.
On an annual basis, however, core inflation fell from 4.7% to 4.3%.
“The most important message is that core inflation is still decreasing,” said Gregory Daco, chief economist at EY. He added that while there was upward pressure from energy prices, the momentum for core inflation remains encouraging.
The Federal Reserve is widely expected to keep interest rates steady at its upcoming meeting on September 19-20, after raising rates 11 times since March 2022. The central bank’s goal is to bring inflation back to its 2% target.
Investors, however, are divided on whether there will be another interest rate hike later this year.
Kristina Hooper, chief global market strategist at Invesco, believes that the latest data has some flaws but will not disrupt the Fed’s plans for the next week. She expects the Fed to maintain a somewhat hawkish stance, suggesting that a rate hike in November is still a possibility.
Several senior officials have expressed support for a pause in rate hikes. Dallas Fed president Lorie Logan stated that “returning inflation to 2% will require a carefully calibrated approach — not endless buckets of cold water.”
Recent labor market figures showed weaker-than-expected wage growth and a slight increase in the unemployment rate. Additionally, job vacancy numbers revealed a sharper decline than anticipated.
Additional reporting by Harriet Clarfelt in New York
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