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Rising energy costs pushed US inflation above forecasts in August, threatening to complicate the Federal Reserve’s battle to keep prices under control.
Consumer prices rose by 3.7 per cent year on year, according to figures released by the Bureau of Labor Statistics on Wednesday, up from 3.2 per cent in July and beating consensus forecasts of 3.6 per cent. On a monthly basis, prices increased 0.6 per cent.
Underlying price pressures were also marginally stronger than expected over the month, but continued to decline year on year.
More than half of the monthly increase in price pressures was driven by a recent jump in petrol prices. Saudi Arabia and Russia are renewing efforts to push the price of oil towards $100 a barrel and Brent crude is already at a 10-month high at about $92.50.
The response in financial markets was subdued, with the yield on the interest rate-sensitive two-year Treasury edging flat and the S&P 500 stock index dipping 0.2 per cent.
Roosevelt Bowman, senior investment strategist at Bernstein Private Wealth Management, predicted that “the Fed will largely look through short-term energy spikes” when it comes to setting monetary policy.
But he said the central bank “will keep a sharp eye” on the potential knock-on effects if the increases continue.
Policymakers tend to focus on core inflation numbers, which strip out volatile food and energy prices, but a higher headline figure can weigh on consumption and impact expectations about future price rises.
Core inflation rose by a more modest 0.3 per cent month on month — slightly above the 0.2 per cent rate for July and higher than expectations due to rising prices for airfares, car rental and motor insurance.
On an annual basis, however, it fell from 4.7 per cent to 4.3 per cent.
“The most important message is that core inflation is still coming down,” said Gregory Daco, chief economist at EY. “We knew there would be some upward pressure from energy prices . . . [but] momentum for core is still encouraging.”
The Fed is widely expected to keep interest rates steady at its next meeting on September 19-20, having lifted rates 11 times since March 2022 in a bid to bring inflation back towards its 2 per cent target.
However, investors are almost evenly split on whether it will make another interest rate rise later in the year.
Kristina Hooper, chief global market strategist at Invesco, said that “there are certainly blemishes” in the latest data, but added these would not be enough to disrupt the Fed’s plans for next week.
“My expectation is that the Fed will be somewhat hawkish in suggesting that November is still on the table,” she said. “It wants to reserve the right to hike again if it feels that it needs to.”
Several senior officials have signalled their support for a pause, with Dallas Fed president Lorie Logan remarking last week that “returning inflation to 2 per cent will require a carefully calibrated approach — not endless buckets of cold water”.
Labour market figures released this month showed weaker than expected wage growth and an uptick in the unemployment rate, while separate numbers on job vacancies showed a sharper than expected decline.
Additional reporting by Harriet Clarfelt in New York