Stubbornly high rents and food prices drive US inflation in August

  • Consumer price index rises 0.1% in August
  • Rents, food and health explain the rise in the CPI
  • Core CPI increases 0.6%; increases 6.3% year-on-year

WASHINGTON, Sept 13 (Reuters) – U.S. consumer prices unexpectedly rose in August and core inflation accelerated amid rising rent and health care costs, giving the Federal Reserve ammunition to achieve a third interest rate hike of 75 basis points next Wednesday.

The surprisingly firm inflation readings reported by the Labor Department on Tuesday came despite an easing in global supply chains, which contributed to a surge in prices earlier in the year. With a resilient labor market supporting strong wage growth, inflation has likely not peaked, keeping the Fed on a hawkish monetary policy path for some time.

“The Fed is almost certain to hike rates aggressively next week, likely by 75 basis points, while strongly rejecting talk of a near-term pause in the tightening cycle,” said Sal Guatieri, senior economist at BMO Capital Markets. in toronto

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The consumer price index rose 0.1% last month after being unchanged in July. Although consumers got some relief from the 10.6% drop in gasoline prices, they had to work harder to pay for food, rent, health care, electricity and natural gas.

Food prices increased by 0.8%, and the cost of food consumed at home increased by 0.7%. Food prices rose 11.4% over the past year, the biggest 12-month increase since May 1979.

Economists polled by Reuters had forecast the CPI to fall 0.1%. In the 12 months through August, the CPI rose 8.3%. That was a slowdown from July’s 8.5% rise and a 9.1% jump in June, which was the biggest gain since November 1981. Inflation exceeded the Fed’s 2% target.

Beyond the dilemma that the August inflation figures present for the US central bank, they are also a headache for the Biden administration and congressional Democrats hoping to limit their losses in the midterm elections on 8 August. November, which is expected to change the House of Representatives. Representatives in Republican hands. The annual CPI has remained above 8% for six consecutive months.

President Joe Biden said Tuesday that it would “take more time and resolve to bring inflation down,” citing the recently passed Inflation Reduction Act, aimed at lowering the cost of health care, prescription drugs and energy, as measures taken by the White House to ease the burden of higher prices on Americans.

Fed officials meet next Tuesday and Wednesday for their regular policy meeting. Financial markets have priced in a 75 basis point rate hike next Wednesday, with potential for a full percentage point, according to CME’s FedWatch tool.

Stocks on Wall Street fell, ending a four-day winning streak. The dollar rallied against a basket of currencies. US Treasury prices rose.

BEHIND THE CURVE

“It is becoming more apparent to market participants that the amount of Fed tightening so far has not been enough to cool the economy and reduce inflation,” said Charlie Ripley, senior investment strategist at Allianz Investment Management in Minneapolis, Minnesota.

Fed Chairman Jerome Powell reiterated last week that the central bank was “strongly committed” to fighting inflation. The Fed raised its policy rate twice by three-quarters of a percentage point, in June and July. Since March, it has raised that rate from near zero to its current range of 2.25% to 2.50%.

Some of the price pressures are coming from the labor market, where the Fed is trying to curb demand for workers.

Data from last week showed first-time jobless claims were at a three-month low. Job growth was strong in August and there were two job openings for every one unemployed on the last day of July.

That supports strong wage gains, contributing to higher prices for services and keeping core inflation elevated.

Excluding volatile food and energy components, the CPI rose 0.6% in August after advancing 0.3% in July. Economists had forecast the so-called core CPI to rise 0.3%.

Owners’ equivalent rent, a measure of how much owners would pay to rent or earn to rent their property, rose 0.7%. It jumped 6.3% year-on-year, the biggest increase since April 1986. Rents are sticky and represent a significant part of the CPI basket, meaning inflation will remain elevated for some time.

Higher mortgage rates and home prices are reducing affordability for many first-time buyers, increasing demand for rental housing. A potential strike by rail workers, which could shut down the US rail system and hamper the movement of goods as early as Friday, could add to the inflation fires.

“While private sector measures of rental growth suggest that the corresponding CPI categories may be close to peaking on a monthly basis, the slow-moving nature of primary rent and OER in the CPI data suggests that the housing will continue to provide a considerable boost to core inflation in the coming months,” said Sarah House, senior economist at Wells Fargo in Charlotte, North Carolina.

Core inflation was also driven by higher prices for furniture and home furnishings, as well as motor vehicle insurance and education. New motor vehicle prices increased by 0.8%. But there were declines in the costs of airfares, communications, and used cars and trucks. Hotel and motel room prices remained unchanged.

Health care costs increased 0.7%, prices for hospital services increased 0.7%, and prescription drugs increased 0.4%. In the 12 months to August, the core CPI rose 6.3% after rising 5.9% in July.

“Wages and housing costs will continue to be the main drivers of future inflation,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University in Los Angeles. “No significant respite in inflation is in sight.”

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Information from LucĂ­a Mutikani; Edited by Chizu Nomiyama and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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