Inflation rose 0.1% in August despite a sharp drop in gasoline prices

Inflation rose more than expected in August as higher housing and food costs offset lower gasoline prices, the Bureau of Labor Statistics reported Tuesday.

The consumer price index, which tracks a wide range of goods and services, rose 0.1% for 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 8% and 6% gains.

Energy prices fell 5% during the month, led by a 10.6% decline in the gasoline index. However, these 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 CPI’s weighting, jumped 0.7% and are up 6.2% from compared to a year ago.

Medical care services also posted a strong increase, rising 0.8% on the month and 5.6% from August 2021. New vehicle prices also rose, rising 0.8%, although that used vehicles fell by 0.1%.

Markets slumped after the news, with futures tied to the Dow Jones Industrial Average falling nearly 350 points after being higher earlier.

“Today’s CPI reading is a stark reminder of the long road we have until inflation comes back to earth,” said Mike Loewengart, head of model portfolio construction for the Global. Morgan Stanley Investment Office. “The optimistic expectations that we are on a downward trajectory and that the Fed will lay off the gas may have been a bit premature.”

Treasury yields jumped, as the two-year note, which is most closely tied to Federal Reserve interest rate movements, jumped 0.13 percentage points to 3.704%.

Markets were widely expecting the Fed to enact a 0.75 percentage point rate hike at its meeting next week. After the CPI’s release, traders completely discounted the possibility of a half-point move and even priced in a 10% chance of a full one-percentage-point rise, according to data from the CPI. CME group.

“They’re watching 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, it’s transportation and it’s rent. Rent just keeps going up. That’s the most stubborn of all the Fed is fighting at this point. “

The report presents contradictory aspects of the inflation picture.

After peaking above $5 a gallon this summer, gasoline prices have fallen sharply. However, the cost of living in other key areas such as food and housing continues to rise, raising fears that the inflation that was concentrated is now starting to spread.

As part of the food price spike, bread prices rose 2.2% on the month and 16.2% from a year ago. Eggs jumped another 2.9% and are up 39.8% for the 12-month period, and canned fruits were up 3.4% and 16.6% respectively.

On the positive side, airline fares continued their recent decline, down 4.6% on the month, but still up 33.4% from a year ago.

There was also 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 down 2.8% from a year ago.

To combat the steep rise in the cost of living, the Federal Reserve has raised interest rates four times this year for a total of 2.25 percentage points. Tuesday’s report is unlikely to have a big impact on the September meeting, but rather through the end of the year and into 2023, as the central bank seeks to tame inflation without dragging down the economy. .

The economy has struggled overall in 2022 after recording its best year since 1984 last year, and inflation has played a major role. Gross domestic product contracted in each of the first two quarters, meeting a widely accepted definition of a recession, and is on track to expand at an annualized rate of just 1.3% in the third quarter, according to the Atlanta Fed.

The Fed is hoping to slow a labor market that has generated strong job gains throughout the year. Specifically, policymakers are concerned about the huge gap between job offers and available workers, as labor market participation is stuck below pre-pandemic levels. This resulted in higher wages which, in turn, put pressure on prices.