A key inflation gauge in August came in slightly hotter than expected – sending the odds the Federal Reserve will hike interest rates next week toward near certainty.
The core figure in the Consumer Price Index – which excludes volatile food and energy prices – rose 0.3% over the month, hotter than estimates of a 0.2% rise, the Bureau of Labor Statistics said Friday. It was up 2.4% over the past 12 months.
Overall CPI rose at a 0.4% pace over the month and was 3.4% on an annual basis, still stubbornly above the Fed’s 2% goal but in line with economists’ forecasts and the same rate as July.
“Friday’s CPI print was in line with expectations, but inflation is still too hot and the Federal Reserve’s hands are tied. A rate hike next week is all but assured,” Skyler Weinand, chief investment officer at Regan Capital, said in a note Friday.
In August, gasoline continued to skyrocket amid the Iran war, rising 3.9% over the month and accounting for more than a third of the overall inflation rate.
“Consumer prices are going in the wrong direction, and remain significantly higher than the Fed’s 2% target. We may see several rate hikes over the coming months in an effort to get short-term interest rates in line with where the market is pricing yields,” Weinand added.
The odds of a quarter-point hike surged to 85.6% Friday, up from 72.4% the previous day and a relative coin toss a month ago, according to CME FedWatch, which tracks Fed Funds futures.
Short-term Treasury yields ticked higher after the report. Longer-term rates were actually slightly lower than the previous day, though that comes after a steep rally that has seen the 10-year US Treasury yield approaching the 5% level.
Stocks rose Friday after four straight days of declines as traders shrugged off the troublesome inflation report and focused on falling oil prices, which had jumped over $109 a barrel.
The Dow Jones Industrial Average jumped 578 points, or 1.1%, by approximately 10:00 a.m. ET, while the S&P 500 and Nasdaq rose 1.1% and 1.2%, respectively.
Brent crude oil fell 3.2% to $104.14 a barrel Friday morning.
According to Friday’s inflation report, gasoline prices in August were 27.4% higher over the past 12 months. Fuel oil, which is used to heat homes, jumped 10.1% in August and is a whopping 52% higher than the same time last year – a concern for homeowners ahead of cooler weather.
Airline fares rose 2.7% in August and were 23.4% higher over the past 12 months.
Tariffs seemingly finished working their way through the economy, as sensitive categories like apparel and household furnishings saw minimal inflation. Apparel prices are 3.6% higher over the past year but were flat over the month. Furnishings were up just 0.1% in August.
But the data is already somewhat backward-looking.
Renewed hostilities with Iran this month sent oil futures back above the $100 level for the first time since July. Diesel prices hit a record high of $6 a gallon on Friday and airline executives have warned that flight prices could continue to climb.
President Trump’s trade war with Canada has also heated up, with the two nations slapping tit-for-tat tariffs on one another that are threatening to raise prices on everything from milk and cheese to rugs, steel, aluminum and household appliances.
At the GOP’s first-ever midterm convention this week, Trump promised a $5,000 check to every American adult if the Republican Party holds onto its narrow control of Congress – a roughly $1 trillion payout that could further fuel inflation.
The Fed’s interest-rate decision next week could play a major role in the November midterm elections, as Americans grow increasingly frustrated with the economy.
Stephen Coltman, head of macro at 21shares, said in a note Friday that a slightly hot core CPI wouldn’t normally solidify a rate hike, but the Fed is likely feeling pressured to appear responsive.
“I think the Fed would have liked more time to see how recent increases in yields are affecting the economy, where consumers are already under pressure amid slowing wage growth and what feels like a tax increase from higher energy prices, but today’s number has likely forced their hand,” Coltman wrote.
Some items showed progress, like grocery prices, which were flat over the month in August. The category is up 2.2% over the past year.
Eggs – which often become a political talking point ahead of elections – rose 2.9% in August, but the category is 23% lower than the same time last year as flocks have recovered following a nationwide bird flu outbreak.
