Inflation Persisted in August, Possibly Impacting a Fed Rate Hike
Prices for many goods and services continued to rise in August, according to the consumer price index that was released Friday.
The report raises the specter of a Federal Reserve interest rate hike at the Federal Open Market Committee meeting Tuesday and Wednesday.
According to the report, the consumer price index rose a seasonally adjusted 0.4% for the month, putting the 12-month increase at 3.4%, the Bureau of Labor Statistics reported Friday.
Both were in line with the Dow Jones consensus.
CNBC reported, however, that stripping out volatile food and energy prices, the core CPI posted a 0.3% monthly gain, or 0.1 percentage point higher than forecast. The core annual rate was 2.4%, matching the estimate.
The CPI is the final major inflation indicator the Fed will review before its policy meeting, which concludes Wednesday with a vote on its key interest rate.
CNBC noted that traders responded to the numbers by ramping up bets that the Federal Open Market Committee will raise its benchmark interest rate by a quarter percentage point. Odds for a hike jumped to nearly 90%, according to the CME Group’s FedWatch tracker of fed funds futures prices.
“There’s no guarantee that the Fed will hike next week, but it’s hard to see how the central bank can justify leaving rates on hold,” said Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management.
Energy pushed the headline number higher, as gasoline prices jumped 3.9%, accounting for more than one-third of the index’s gain. The energy index broadly rose 2.1% amid pressure from escalating tensions in the Middle East and was up 16.3% from a year ago. Gasoline rose 27.4%, and fuel oil surged 52% on a 12-month basis, according to CNBC.
Food prices edged 0.1% higher as food at home costs held flat. The food index, however, accelerated 2.7% annually.
Shelter Costs Rise
CNBC noted that another significant factor was a 0.3% climb in shelter costs, which had moderated over the prior two months.
Heading into the CPI release, markets already were pricing in a nearly 70% probability that the central bank would vote to increase its benchmark interest rate by a quarter percentage point, CNBC said.
Views differ on which way the Federal Open Market Committee will tilt, with some speculating the difference could come down to hundredths of a percentage point in the CPI reading.
Fed Chair Kevin Warsh has expressed a commitment to getting inflation back down to the Fed’s 2% target and said recently that if the numbers don’t improve, “we have work to do.” CNBC said Warsh’s comments were widely interpreted as advocating a rate hike, though several key officials over the past few weeks have counseled a more patient approach.
“Chair Warsh and others signaled that interest rates can remain on hold only if disinflation continues and today’s August report did not deliver that,” said Kathy Bostjancic, Chief Economist at Nationwide. “Further, the renewed march higher in oil, gasoline and diesel prices adds to concerns that higher energy prices could spill over to other goods and services and inflation expectations.”
Nationwide now expects a quarter-point hike next week. The fed funds rate, a benchmark for multiple consumer loans, is currently pegged in a range of 3.5%-3.75%, where it has been for all of 2026.
First American Senior Economist Sam Williamson said the uptick in inflation opens the door for the rate increase.
“Energy turned up the heat on headline inflation, but the firmer core reading is the real story,” Williamson said. “That tilts the Federal Reserve toward a rate hike and pushes mortgage-rate relief further out. Rising incomes and cooling house prices are helping buyers regain purchasing power, but elevated borrowing costs are still winning the affordability tug of war.”
Williamson said several factors impacted the index.
Higher Energy Prices
“Inflation regained momentum in August, with higher energy prices lifting the headline rate and stubborn services prices keeping underlying inflation pressures alive. The Consumer Price Index rose 0.4% in August and 3.4% from a year ago, both in line with expectations. The acceleration from July’s 0.1% increase was largely an energy story. Gasoline prices increased 3.9% and accounted for more than one-third of the monthly increase, while energy prices are now 16.3 percent higher than a year ago,” Williamson noted.
“The real surprise came from core inflation, which excludes food and energy. It ticked up 0.3% in August, above the 0.2% forecast and July’s 0.2% increase. The annual rate eased to 2.4% from 2.5%, but the firmer monthly reading and persistent services inflation show that underlying price pressures remain stubborn. The firmer core reading puts another thumb on the scale toward a Federal Reserve rate hike next week. With the labor market still on solid footing, policymakers have room to lean harder against inflation. That would likely keep borrowing costs elevated in the near term as markets price in a higher path for interest rates.”
How will the report impact home buyers?
“For home buyers, the path to lower mortgage rates still runs through lower inflation. Over time, more restrictive policy may help by convincing investors that inflation will come back under control, but meaningful rate relief remains out of reach for now. For now, rising incomes and cooling house prices are still helping buyers slowly regain some purchasing power, but borrowing costs are still pulling harder in the affordability tug of war,” Williamson said.
