US inflation picks up in August, and markets move to price a rate rise
The consumer price index rose 0.4% in August against 0.1% in July, with a 3.9% jump in petrol prices accounting for more than a third of it. Futures moved to an 87% chance of a quarter-point increase next week.
US consumer prices accelerated in August and a key measure of underlying inflation posted its largest increase in four months, reinforcing expectations that the Federal Reserve will raise interest rates when it meets next week.
The consumer price index rose 0.4% last month after edging up 0.1% in July, the Bureau of Labor Statistics said on Friday. Over the 12 months through August, consumer inflation advanced 3.4%, the same pace as in July. The monthly figure was in line with economists' expectations.
Where the increase came from
Energy did most of the work. A 3.9% jump in petrol prices, after two consecutive monthly declines, accounted for more than a third of the CPI's increase over the month.
Other motor fuels, a category that includes diesel, surged 9.6% on the month and 44% year on year.
There was some relief at the supermarket, where food prices were softer.
What the market did
Financial markets initially priced a 91% chance of a quarter-point rate increase at the Fed's meeting on Tuesday and Wednesday, before settling back to 87%, according to CME's FedWatch tool. That was up from 72% on Thursday.
The Fed's benchmark overnight interest rate currently sits in a range of 3.50% to 3.75%.
A move from 72% to 87% inside a day is the market repricing on the data rather than drifting. Friday's CPI followed strong readings on Thursday in several components of the producer price index that feed into the personal consumption expenditures indexes — the measures the central bank actually targets at 2%.
Taken together, the two reports led economists to conclude that PCE inflation excluding food and energy picked up in August.
Why economists expect more than one move
Most economists said the firmer inflation readings, combined with signs that the labour market regained its footing in August, would compel Fed officials to raise borrowing costs not only next Wednesday but possibly again in October or December.
Their reasoning rests on two forces they expect to persist. The first is the war involving Iran, which they argue will push the energy shock through the wider economy. The second is the artificial intelligence buildout, which they expect to add to inflation through its demand for power, construction and equipment.
Crude oil prices climbed back above $100 a barrel this week, and the US national average diesel price passed $6 a gallon for the first time.
The transmission problem
Sung Won Sohn, a professor of finance and economics at Loyola Marymount University, set out why a fuel price rise does not stay a fuel price rise.
"Energy inflation does not stay at the gas station. It travels by truck, airplane and cargo ship into nearly every store in America," he said.
The category that rose 9.6% on the month and 44% on the year is the one that includes diesel — the fuel the trucks in Sohn's description run on.
Sohn's conclusion on policy followed from it: the Fed "cannot afford to let an energy shock become an everything shock", he said, adding that it is now more likely than not to raise its policy rate.
The position the Fed is in
The central bank is being asked to respond to an inflation impulse that originates outside the economy it controls. Interest rates do not produce oil, and raising them does not reopen a shipping lane.
What they can do is prevent a one-off price shock becoming an expectation — the process by which firms and households begin setting prices and wages on the assumption that inflation will stay high, at which point it does.
That distinction is what Sohn's phrasing points at, and it is the argument most economists quoted in the report are making for moving next week rather than waiting.
What is still uncertain
The 3.4% annual rate is unchanged from July, which is the case for patience. The monthly acceleration from 0.1% to 0.4%, and the composition of it, is the case for moving.
Consumers are also bracing for higher inflation expectations, which the report notes may weigh on economic sentiment. The Fed's decision comes on Wednesday.
