Inflation rose more than expected in August as rising housing and food costs offset a drop in gasoline prices, the Bureau of Labor Statistics reported Tuesday.
The consumer price index, which tracks a wide swath of goods and services, rose 0.1% in the month and 8.3% over the past year. Excluding volatile food and energy costs, the CPI rose 0.6% from July and 6.3% from the same month in 2021.
Economists had expected headline inflation to fall 0.1% and core inflation to rise 0.3%, according to Dow Jones estimates. The respective year-over-year forecasts were for gains of 8% and 6%.
Energy prices fell 5% in the month, led by a 10.6% drop in the gasoline index. However, those declines were offset by increases elsewhere.
The food index rose 0.8% in August and housing costs, which account for about a third of the weight in the CPI, rose 0.7% and are 6.2% higher than a year ago.
Health care services also showed a big increase, rising 0.8% in the month and 5.6% from August 2021. New vehicle prices also increased, rising 0.8%, although vehicles used fell 0.1%.
Markets slumped on the news, with futures linked to the Dow Jones Industrial Average down nearly 350 points after rising earlier.
“Today’s CPI reading is a stark reminder of the long way to go until inflation gets back on its feet,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley’s Office of Global Investments. “Illusory expectations that we are on a downward trajectory and that the Fed will stop wasting gas may have been a bit premature.”
Treasury yields rose further as the two-year note, which is most closely tied to moves in the Federal Reserve interest rate, rose 0.13 percentage point to 3.704%.
Markets widely expected the Fed to enact a 0.75 percentage point rate hike at its meeting next week. After the CPI release, traders completely ruled out the possibility of a half point move and even discounted a 10% chance of a full one percentage point rise, according to data from CME Group.
“They’re looking at where the inflation is coming from,” said Quincy Krosby, chief equity strategist at LPL Financial. “It’s very clear to them that it’s food, transportation and rent. Rent keeps going up. That’s the most stubborn thing the Fed is fighting right now.”
The report presented mixed sides of the inflation picture.
After peaking at $5 a gallon this summer, gas prices have receded considerably. However, the cost of living in other key areas, such as food and housing, continues to rise, raising concerns that the inflation that had been concentrated is now beginning to spread.
Within the jump in food costs, bread prices rose 2.2% in the month and 16.2% more than a year ago. Eggs are up another 2.9% and up 39.8% in the 12-month period, and canned fruit is up 3.4% and 16.6%, respectively.
On the bright side, airline fares continued their recent decline, down 4.6% in the month, though still 33.4% higher than a year ago.
There was also some good news for workers in the August report, as real average hourly earnings rose a seasonally adjusted 0.2% for the month. However, they remained 2.8% below a year ago.
To combat the widespread rise in the cost of living, the Federal Reserve has raised interest rates four times this year by a total of 2.25 percentage points. Tuesday’s report was not expected to have much of an impact at the September meeting, but until the end of the year and into 2023, as the central bank seeks to rein in inflation without sinking the economy.
Overall, the economy has struggled in 2022 after posting its best year since 1984 last year, with inflation playing a big role. Gross domestic product shrank in each of the first two quarters, meeting a widely accepted definition of a recession, and is on track to rise at an annualized pace of just 1.3% in the third quarter, according to the Atlanta Fed.
The Fed hopes to slow down a labor market that has generated solid job gains during the year. Specifically, policymakers are concerned about the huge gap between job openings and available workers, as labor force participation is stuck below pre-pandemic levels. That has resulted in rising wages which, in turn, has put pressure on prices.