U.S. Inflation Accelerates in August, Fueling Expectations for Fed Rate Hike
U.S. consumer inflation rose more than expected in August due to rebounding gasoline prices, increasing market bets on a Federal Reserve interest rate hike at its upcoming September meeting.
U.S. consumer inflation accelerated in August, driven largely by rising energy costs, strengthening the case for the Federal Reserve to raise interest rates later this month.
According to data released by the Labor Department’s Bureau of Labor Statistics, the Consumer Price Index (CPI) increased 0.4 percent in August after a 0.1 percent rise in July. On an annual basis, consumer inflation advanced 3.4 percent in the 12 months through August, matching the figure recorded in July.
Excluding volatile food and energy categories, the core CPI rose 0.3 percent in August and increased 2.4 percent year-on-year. Economists’ estimates for August's core Personal Consumption Expenditures (PCE) price index ranged from a 0.15-per-cent gain to a 0.28-per-cent increase.
The resurgence in inflationary pressures has shifted financial market expectations. Ahead of the CPI report, markets had already priced in a roughly 70-percent chance of a 25-basis-point rate hike at the Fed’s Sept. 15-16 policy meeting. The current benchmark rate range stands between 3.50 per cent and 3.75 per cent.
A key factor bolstering the argument for tightening monetary policy is the surge in oil prices. Oil climbed back above US$100 a barrel on Thursday, while diesel prices reached record highs. These developments have raised concerns that inflation will remain elevated and broaden out across the economy.
Despite these signals, political tensions surrounding the central bank persist. President Donald Trump posted on social media pressuring the Fed to lower rates, warning of trade disruptions with deficit countries if action was not taken. This comes despite earlier comments from Fed Governor Christopher Waller suggesting a pause might be appropriate if inflation cooled.
Economists have warned that such political intimidation may be affecting bond yields, noting a surge in yields on long-term U.S. government bonds attributed to these pressures. Additionally, frustration over higher prices has contributed to an erosion of President Trump’s approval ratings, raising the potential for the Republican party to lose control of the U.S. Congress in the November midterm elections.