US consumer prices continued to rise last month — but the Fed probably won’t raise rates

By Bryan Mena, CNN

Washington, DC (CNN) — US inflation accelerated in August for the second-straight month, pushed up by rising gas prices. However, core inflation, which strips out volatile food and energy prices, continued to slow, according to data from the Bureau of Labor Statistics released Wednesday.

The Consumer Price Index, a closely watched inflation gauge, rose 3.7% in August from a year earlier, up from July’s 3.2% rise. That’s slightly hotter than the 3.6% annual rate economists were expecting, according to Refinitiv. On a month-to-month basis, prices rose 0.6% in August, compared with a 0.2% gain in July.

However, core inflation slowed to 4.3% from 4.7% for the 12 months ending in August, its slowest pace since September 2021, and an indication that the Federal Reserve’s 11 rate hikes are working their way through the economy. Monthly core inflation rose by 0.3% in August, picking up significantly for the first time since February. Fed officials pay closer attention to core inflation.

Wednesday’s inflation report likely keeps the Fed on track for a pause in rate hikes next week when central bank officials meet to deliberate monetary policy.

US stocks were slightly higher after the August CPI release, with the Dow up 0.1%, the S&P 500 0.2% higher and the Nasdaq Composite gaining 0.4%.

Spiking energy prices

Gas prices were the largest contributor to the CPI’s acceleration in August, accounting for more than half of the increase. The CPI’s gasoline index jumped 10.6% in August from the prior month, up sharply from the 0.2% gain in July. The overall energy index, which includes gasoline, advanced 5.6% in August from July. Rising shelter costs continued to feed into inflation.

President Joe Biden acknowledged the spike in gasoline prices, saying in a statement Wednesday: “Overall inflation has also fallen substantially over the last year, but I know last month’s increase in gas prices put a strain on family budgets. That’s why I remain laser-focused on cutting energy costs, including by investing in clean energy to bolster our energy security.”

Global oil prices have risen recently as OPEC+ nations cut production and demand soared. A deadly flood in Libya this week disrupted oil exports, which will push up prices at the pump. The national average for regular gasoline stood at $3.85 a gallon on Wednesday, according to AAA, the highest level in 10 months. Gasoline prices are highly visible indicators of inflation, so more pain at the pump could also weigh on US consumers’ moods.

But economists don’t expect volatile energy prices to prevent inflation’s slowdown in the months ahead.

“The pass-through effect from energy prices to core inflation is small, relative to the downdraft that we’re seeing from other areas,” Sarah House, senior economist at Wells Fargo, told CNN in an interview.

“Firmer energy prices, if sustained, could feed through to the core and make the Fed’s jobs harder in terms of returning inflation back to its 2% target on a sustained basis, but I think we’re going to see that dynamic overwhelmed by the continued unwinding of some of the supply and even demand distortions that we’ve seen since the pandemic,” she said.

What it means for the Fed

The Fed is still widely expected to hold rates steady next week because of several factors poised to facilitate inflation’s slowdown, such as weaker consumer spending and a cooler US job market — but an additional rate hike beyond September remains a possibility.

“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,” wrote Jason Pride, chief of investment strategy and research at Glenmede, in an analyst note. “However, the pickup in inflation may increase the chance of additional tightening before year-end, as getting the inflation genie back in the bottle does not appear as straightforward as some would have hoped.”

Financial markets see a 97% chance that the Fed will decide to pause, according to the CME FedWatch Tool, while the chances of another pause in November are lower, at around 58%.

Fed officials are still hopeful they can pull off a so-called soft landing, a scenario in which inflation slows down to the Fed’s 2% target without a sharp rise in unemployment or a recession. US inflation, as measured by the CPI, has slowed steadily from its four-decade high in June 2022 as the broader economy held steady and the job market remained intact. That’s despite the Fed’s most aggressive rate-hiking campaign since the 1980s.

It’s unclear how much economic activity will slow because of the Fed’s action, and when that could begin to take hold. A recent paper from the Chicago Fed argued that most of the effects from the Fed’s rate increases have already passed through the economy, and that the current level of rates are enough to bring inflation back down to 2% by mid-2024 without a recession.

But some central bankers think the Fed isn’t done raising rates just yet.

“Another skip could be appropriate when we meet later this month,” Federal Reserve Bank of Dallas President Lorie Logan said last week. “But skipping does not imply stopping. In coming months, further evaluation of the data and outlook could confirm that we need to do more to extinguish inflation.”

Slower inflation ahead

Inflation is expected to cool for the rest of the year, despite the threat of volatile energy markets.

“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,” wrote Gregory Daco, chief Economist at EY-Parthenon, in a note.

Shelter costs, which make up a large chunk of the CPI, rose 0.3% in August from the prior month, the smallest gain since January 2022. San Francisco Fed researchers argued in a recent paper that shelter inflation could turn negative in the second half of 2024. That would help the CPI drift down.

The US job market is also widely expected to cool in the coming months, which could take some further steam out of inflation.

Fed Chair Jerome Powell has said the central bank needs to see the labor market “come into better balance” to successfully defeat inflation.

The US economy currently has millions more jobs available than it does job seekers, which plays a role in pushing up prices, since employers are forced to raise wages when they are having a difficult time hiring enough workers — and those costs are then passed on to consumers.

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