Stubbornly high rents and food prices boost US inflation in August

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

The surprisingly firm inflation readings reported by the Labor Department on Tuesday were despite a loosening of global supply chains, which had contributed to a spike in prices earlier in the year. With a resilient labor market supporting strong wage growth, inflation likely hasn’t peaked, keeping the Fed on an aggressive monetary policy path for some time.

“The Fed is almost certain to raise rates aggressively next week, likely 75 basis points, while firmly pushing back on talk of a near-term pause in the tightening cycle,” said Sal Guatieri, senior economist. at BMO Capital Markets in Toronto.

The consumer price index edged up 0.1% last month after remaining unchanged in July. Although consumers were relieved by a 10.6% drop in gas prices, they had to dig deeper to pay for food, rent, health care, electricity and natural gas.

Food prices rose 0.8%, with the cost of food eaten at home rising 0.7%. Food prices have jumped 11.4% over the past year, the biggest 12-month increase since May 1979.

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

Beyond the dilemma the August inflation numbers present to 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. of November 8, which should overthrow the House of Representatives in the hands of the Republicans. The annual CPI has remained above 8% for six consecutive months.

President Joe Biden said on Tuesday he would “take more time and resolve to bring inflation down,” and cited the recently passed Inflation Reduction Act aimed at lowering the cost of health care, prescription drugs and energy as moves 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 forecast a rate hike of 75 basis points next Wednesday, with the potential for a full percentage point, according to CME’s FedWatch tool.

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

BEHIND THE CURVE

“It is becoming increasingly clear to market participants that the degree of Fed tightening so far has not been sufficient to cool the economy and bring inflation down,” said strategist Charlie Ripley. investment principal 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 key rate by three-quarters of a percentage point twice, in June and July. Since March, it has taken 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 dampen demand for workers.

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

This is supporting strong wage gains, contributing to higher service prices and keeping underlying inflation high.

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

Equivalent landlord rent, a measure of how much landlords would pay to rent or earn by renting out their property, rose 0.7%. It jumped 6.3% on an annual basis, the biggest increase since April 1986. Rents are sticky and are a large part of the CPI basket, which means inflation will remain high for some time .

Rising mortgage rates and house prices are reducing affordability for many first-time homebuyers, increasing demand for rental units. A potential strike by railroad workers, which could shut down the U.S. rail system and impede the flow of goods as early as Friday, could add to the inflation fires.

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

Core inflation was also fueled by higher prices for home furnishings and operations as well as car insurance and education. Prices for new motor vehicles rose 0.8%. But there has been a decline in the costs of airfares, communications, and used cars and trucks. Prices for hotel and motel rooms remained unchanged.

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

“Wages and housing costs will remain 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 from inflation is in sight.”

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

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