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US Core CPI Accelerates: Implications for Another Fed Hike in 2021?

Accelerates, Core, CPI, Fed, Hike, Implications

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US Inflation Rises in August, Raises Possibility of Interest Rate Hikes

Published on September 15, 2022


Underlying US inflation ran at a faster-than-expected monthly pace in August, leaving the door open for additional interest-rate hikes from the Federal Reserve.

Core Consumer Price Index

  • The core consumer price index, which excludes food and energy costs, advanced 0.3% from July.
  • This marks the first acceleration since February.
  • From a year ago, it increased 4.3%, in line with estimates.
  • This marks the smallest advance in nearly two years.

Economists’ View

Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI.

  • The overall CPI rose 0.6% from the prior month, the most in over a year.
  • This reflects higher energy prices, with gasoline costs accounting for over half of the advance in the overall measure in August.

Concerns and Implications

The report adds to concerns that the renewed momentum in the economy is reigniting price pressures.

  • Fed officials have been growing more optimistic they can tame inflation without a recession.
  • A reacceleration in price growth could force them to push interest rates even higher, with the risk of sparking a downturn in the process.

Impact on Federal Reserve’s Decision

The CPI is one of the last major reports the Fed will see before its meeting next week.

  • Policymakers are largely expected to hold rates steady.
  • Chair Jerome Powell said last month interest rates will stay high and could rise even further should the economy and inflation fail to cool.

Market Reaction

Treasury yields and stock futures fluctuated.

  • Traders still expect the Fed to leave rates unchanged next week.
  • Bets for a November hike were at about 50%.

Factors Driving CPI Increase

The advance in the CPI was supported by higher costs for rent, air travel, and motor-vehicle insurance.

  • Rent, air travel, and motor-vehicle insurance rose the most annually since 1976.
  • New-car prices rose for the first time in five months.
  • Costs declined for used cars and admissions to concerts and movies.

Shelter Prices and Services Component

Shelter prices, the biggest services component, increased 0.3%.

  • This is the smallest gain since early last year and was dragged down by hotel stays.
  • A moderation in housing costs is an essential feature for a sustained downward trend in core inflation.

Services Prices

Excluding housing and energy, services prices rose 0.4% from July.

  • This is the fastest increase in five months.
  • Services prices rose 4% from a year ago.
  • According to Bloomberg calculations, Powell and his colleagues compute this metric based on a separate index.

Expert Opinion

According to Bloomberg Economics, the Fed is likely to look through the energy-price increase, but it’s not clear they’ll do the same for the increase in transportation services.

Impact on Americans

For most Americans, household budgets are still under strain.

  • Energy costs broadly rose, especially gasoline, which rose more than 10% last month.
  • Utility costs also increased.
  • Grocery prices rose, but at the slowest annual pace in two years.

Goods Prices

Goods prices have been decelerating, helping to lower broader inflation.

  • Core goods prices, which exclude food and energy commodities, fell for a third month.

Concerns and Outlook

While inflation expectations have remained stable and the job market largely resilient, Americans are growing more pessimistic about the economy.

  • Prices, especially for essentials, are still elevated.
  • This has forced many to rely on credit cards or savings to support spending.
  • The imminent resumption of student loan payments will be a renewed burden for millions of borrowers.

Business Outlook

Businesses are also souring on the outlook.

  • A report showed the share of small businesses raising selling prices rose in August for the first time in nine months.
  • More owners cited inflation as their single biggest problem.

Wage Growth

While Americans are finally starting to see their wage gains outpace price growth, the gap is starting to narrow.

  • Inflation-adjusted wages rose 0.5% from a year earlier.
  • This marks a second month of decelerating earnings growth.

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