People shop in the produce section at a Walmart store in Secaucus, N.J., on July 11.Eduardo Munoz Alvarez/The Associated Press
U.S. consumer prices rose slightly in August, but underlying inflation showed some stickiness amid higher costs for housing and other services, further dashing hopes of a half-point interest-rate cut from the Federal Reserve next week.
The mixed inflation report from the Labour Department on Wednesday followed data last week showing the labour market still cooling in an orderly fashion in August, defying fears of a sharp deterioration, with the unemployment rate retreating from a near three-year high touched in July.
Financial markets boosted the chances of a quarter-point rate cut next Wednesday and sharply lowered the probabilities of a 50-basis-point reduction.
“The road to normal inflation hit a bump in August as lingering pressures for housing and service costs once again cropped up,” said Ben Ayers, senior economist at Nationwide. “This should clinch a smaller, 25-basis-points rate cut from the Fed next week as Fed officials remain wary to feed any lingering price momentum for the economy.”
The consumer price index increased 0.2 per cent last month after rising by a similar margin in July, the Labour Department’s Bureau of Labour Statistics said. The rise in the CPI was in line with economists’ expectations.
Food prices edged up 0.1 per cent after climbing 0.2 per cent in each of the past two months. Grocery-store food prices were unchanged as increases in the costs of meats, fish, eggs and dairy products were offset by decreases in the prices of non-alcoholic beverages, fruits and vegetables.
The costs of energy products dropped 0.8 per cent after being unchanged in July. Gasoline prices fell 0.6 per cent, while electricity was 0.7 per cent cheaper and natural gas cost 1.9 per cent less.
In the 12 months through August, the CPI advanced 2.5 per cent. That was the smallest year-on-year rise since February, 2021, and followed a 2.9-per-cent increase in July.
Prices increased at a 1.1-per-cent annualized rate in the past three months, indicating that a disinflationary trend was now firmly entrenched, allowing policy makers to focus more on the labour market in their quest to sustain the economic expansion.
The U.S. central bank, which has a 2-per-cent inflation target, tracks the Personal Consumption Expenditures (PCE) price indexes for monetary policy. Government data last week showed non-farm payrolls increasing below expectations in August but the unemployment rate falling to 4.2 per cent from 4.3 per cent in July.
The labour market is cooling amid a significant moderation in hiring, reducing the risks of inflation reigniting. In addition, oil prices have dropped and supply chains have improved considerably. Market rents continue to trend lower, which suggests the official rent measures will move down at some point.
Financial markets saw a roughly 15-per-cent probability of a 50-basis-point rate cut at the Fed’s Sept. 17-18 policy meeting, down from 29 per cent before the CPI data were published, according to CME Group’s FedWatch Tool. The odds of a quarter-point rate reduction were around 85 per cent, up from 71 per cent earlier.
The central bank has maintained its benchmark overnight interest rate in the current 5.25-per-cent to 5.50-per-cent range for a year, having raised it by 525 basis points in 2022 and 2023.
Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
“Prospects for a gradual, rather than aggressive, rate-cutting cycle should be embraced by investors,” said Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management. “That would reflect broader economic health, and a normalization of activity as the vestiges of pandemic-era distortions fizzle away.”
U.S. consumer prices rose slightly in August, but underlying inflation remained sticky amid higher rents and costs for some services, which could discourage the Federal Reserve from delivering a half-point interest rate cut next week.
Reuters
Annual consumer price growth has slowed considerably from a peak of 9.1 per cent in June, 2022, as higher borrowing costs curb demand.
Excluding the volatile food and energy components, the CPI climbed 0.3 per cent in August after rising 0.2 per cent in July. The so-called core CPI, seen as a measure of underlying inflation, was boosted by a 0.5-per-cent rise in shelter costs, which includes rents and hotel and motel accommodation, after advancing 0.4 per cent in July.
Owners’ equivalent rent, a measure of the amount homeowners would pay to rent or earn from renting their property, rose 0.5 per cent after advancing 0.4 per cent in July.
Economists were, however, unperturbed by the rise, which they attributed to sampling noise. They also pointed to the moderation in market rent increases. The rise in rents is unlikely to drive up the PCE price measures as rents have a smaller weighting compared with the CPI basket.
Based on the CPI data, economists estimated that the core PCE rose 0.2 per cent in August, matching July’s gain. That forecast could change after the producer price data on Thursday.
The cost of household insurance shot up 0.8 per cent after being unchanged in July. Airline fares rebounded 3.9 per cent after declining 1.6 per cent in July. Motor-vehicle insurance also cost more, though the pace of increase slowed from the prior month.
The cost of lodgings, including hotel and motel rooms, surged 2 per cent after rising 0.2 per cent in July. Health care costs fell for a second straight month. Over all, services costs rose 0.3 per cent for the second consecutive month. Services less rent of shelter gained 0.1 per cent after being unchanged for two straight months. Goods prices extended their decline, with a 0.1-per-cent drop in August. They were pulled lower by a 1.0-per-cent decrease in used car and truck prices as well as moderate declines in the costs of prescription medication and household furnishings. Core goods prices fell 0.2 per cent after slipping 0.3 per cent in July.
In the 12 months through August, the core CPI increased 3.2 per cent. Core inflation rose by the same margin in July. It increased at a 2.1-per-cent rate in the past three months.
“Every measure of pipeline price pressures still is giving a clear benign steer on the inflation outlook,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “We continue to expect core CPI inflation to ease over coming months, reaching 2 per cent in the first half of 2025.″