By Andrew Moran
The U.S. annual inflation rate rose to 3.7 percent in August, coming in higher than economists’ expectations of 3.6 percent. This was up from the consumer price index (CPI) reading of 3.2 percent in July.
According to the Bureau of Labor Statistics (BLS), the monthly inflation rate jumped 0.6 percent, up from 0.2 percent in the previous month, matching market estimates.
Core inflation, which omits the volatile food and energy sectors, eased to 4.3 percent, down from 4.7 percent. This also met the consensus estimate. The core CPI edged up 0.3 percent, up from 0.2 percent.
The reacceleration in the annual inflation rate was driven by a significant jump in energy prices, with gasoline soaring 10.6 percent and fuel oil climbing 9.1 percent month-over-month.
Electricity costs slowed to an annualized pace of 2.1 percent, while utility-piped natural gas service plummeted to 16.5 percent year-over-year.
Shelter and food rose 0.3 percent and 0.2 percent, respectively.
Within the food index, the numbers were mixed. Supermarket prices rose 0.2 percent and were 4.3 percent higher than they were at the same time a year ago.
On a month-over-month basis, bread tumbled 0.8 percent, eggs plunged 2.5 percent, milk was flat, coffee dropped 0.7 percent, and fresh fruits and vegetables slipped 0.2 percent. However, major kitchen items swelled last month, such as beef and veal (1.2 percent), pork (2.2 percent), chicken (1.3 percent), and fish and seafood (0.9 percent).
The shelter index, which accounts for about one-third of the overall CPI report, remains elevated at an annual rate of 7.3 percent, and rent of primary residence climbed to 7.8 percent. From July to August, rents increased 0.3 percent.
Transportation services also lifted the CPI, surging 2 percent. New vehicles were 0.3 percent more expensive, while used cars and trucks fell 1.2 percent. Apparel inched 0.2 percent higher. Medical care commodities advanced 0.6 percent.
Annualized services inflation maintained its downward trend, slowing to 5.4 percent, the lowest since April 2022.
The U.S. financial markets dipped in pre-market trading following the CPI data, with the leading benchmark indexes down about 0.2 percent.
U.S. Treasury yields were mixed, with the 10-year yield adding 2.4 basis points to nearly 4.29 percent. The 2-year yield shed about 1 basis point to about 5 percent.
The U.S. Dollar Index (DXY), a measurement of the greenback against a basket of currencies, recorded modest gains and inched toward the key 105.00 mark.
The producer price index (PPI), which typically leads the CPI, could be the next to reveal a reacceleration, with the consensus estimate showing a jump to 1.2 percent year-over-year and an increase of 0.4 percent month-over-month.
Inflation and Interest Rates
With energy commodities trending upward, forecasts for the September CPI highlight that inflation will continue to be elevated heading into the fall.
The Federal Reserve Bank of Cleveland’s Inflation Nowcasting model estimates the annual inflation rate will be 3.8 percent, and the CPI will climb 0.4 percent month-over-month.
Despite the uptick in inflation, many economists assert that price pressures are moderating, forcing them to suggest that a soft landing is achievable.
Goldman Sachs analysts anticipate that inflation “will fall quite a bit further,” supporting the case that the U.S. central bank is likely finished hiking interest rates and could potentially cut them in the second quarter of 2024.
“Fed officials are unlikely to move quickly toward easier policy unless growth slows more than we are forecasting in coming quarters. We therefore expect only very gradual cuts of 25bp per quarter starting in 2024Q2,” the bank analysts wrote in a research note.
During his keynote address at last month’s Jackson Hole economic symposium, Fed Chair Jerome Powell warned that the institution could continue raising interest rates because inflation is “too high.” But the Fed would “proceed carefully” whatever the policy decision made by the Federal Open Market Committee (FOMC).
Mohamed El-Erian, a top economist, thinks this will not persuade the Federal Reserve to pull the trigger on a rate hike this month.
“The popular media headlines will focus on an inflation rate that is now 3.7%, the second consecutive month up. Core is lower at 4.3%, with a question on the possible pass-through from higher oil,” he wrote on X, previously known as Twitter. “None of this is likely to deter the Fed from leaving rates unchanged next week. It does, however, add some uncertainty about its November 1st decision.”
According to the CME FedWatch Tool, the futures market is pricing in a rate pause at this month’s two-day meeting, leaving the benchmark fed funds rate at a target of 5.25 percent and 5.5 percent.
Giuseppe Sette, the president of investment research firm Toggle Ai, thinks if core CPI stabilizes below 4 percent, “then the hiking cycle is well and truly defunct.” “There will be no hike in September or afterwards,” he said in a note. “At the same time, nothing warrants a rate cut – given the current mix of healthy growth and stable mid-digit inflation.”
But skipping a rate increase does not imply that the Fed is finished its tightening cycle, says Dallas Fed Bank President Lorie Logan.
Speaking at the Dallas Business Club at Southern Methodist University on Sept. 7, Ms. Logan noted that a skip “could be appropriate.” But with various inflation measures remaining high, “skipping does not imply stopping.”
“These numbers indicate it is too soon to confidently say inflation will trend to 2 percent in a timely way,” she said in her prepared remarks. “In coming months, further evaluation of the data and outlook could confirm that we need to do more to extinguish inflation.”
New York Fed President John Williams thinks monetary policy is in a “good place” and is achieving “the desired effects.” Whether the central bank raises rates again will depend on the data, but “we have to be careful not to overreact to shorter-term developments,” Mr. Williams told a conference sponsored by Bloomberg News.
“All that talk about ‘we’re about to have a recession’ has vanished,” he stated.
The Atlanta Fed Bank’s third-quarter GDPNow model estimate suggests 5.6 percent growth. The recently relaunched New York Fed GDP Nowcast shows a cooler 2.25 percent expansion. The St. Louis Fed’s Real GDP Nowcast shows the GDP growth contracting by 0.25 percent in the July-to-September period.