US inflation rose by a higher-than-expected 8.3% in August despite falling gasoline prices — adding pressure on the Federal Reserve as it decides whether to impose another super-size interest rate hike.
The August reading of the Labor Department’s Consumer Price Index, a closely watched measure of the costs of goods and services, rose 0.1% compared to July — surprising economists who had expected a slight month-over-month decline.
The higher-than-expected number was driven partly by stubbornly high prices for food and housing that continue to slam American households. Core inflation, which excludes volatile food and gas prices, rose 6.3% year-over-year — up sharply from the rate of 5.9% seen in June and July.
The CPI’s food index, meanwhile, surged 11.4%, its largest year-over-year increase since May 1979. Food prices were up 0.8% in the past month alone. Other household costs that rose included housing, medical care, new cars and home furnishings.
Both Fed Chair Jerome Powell and other top officials at the central bank have made clear that they plan to continue with rate hikes until inflation begins to meaningfully recede. Prices are still well above the 2% range for inflation that policymakers deem acceptable.
The hot August report affirms the economy is still “years away” from the 2% target range and “underscores the policy path of the Federal Reserve” toward higher interest rates, according to Joe Brusuelas, chief economist for RSM US.
Inflation could shoot even higher in the months if the dispute between Russia and Western nations over the invasion of Ukraine results in a full-fledged European energy crisis this winter.
“My sense is that if the US, the UK and EU impose a price cap on Russian oil exports and the Russians then follow through on their threats to cut off oil flows to the West, we’ll see reversal in oil markets,” Brusuelas told The Post.
“We’ll test the June highs, both in Brent crude and West Texas Intermediate, and you’ll see that very nice $3.70 per gallon gasoline price reverse and move back up. That’s clearly the big risk to the inflation outlook right now,” he added.
Dow futures plunged nearly 500 points after the worse-than-expected report, highlighting investor fears about the Fed’s policy path.
Ahead of the report’s release, economists expected headline inflation in August to jump 8% year-over-year but decline by 0.1% compared to July.
They predicted core inflation would rise 6% compared to last year and 0.3% compared to last month.
Headline inflation ticked lower as gas prices continued to recede from record highs reached in June. The national average price of a gallon of gas was $3.707 as of Monday, down from a peak of more than $5 in mid-June.
But the price of other daily necessities such as food, rent and many consumer goods have stayed uncomfortably high for cash-strapped Americans.
The latest inflation report will factor into the conversation as Fed officials meet on Sept. 20 and 21 to discuss their next interest rate hike.
During a speech last week, Powell said the Fed was wary of “prematurely loosening policy” and was “strongly committed to this project and we will keep at it until the job is done.” He had previously warned of “some pain” for households due to the interest rate hikes.
Meanwhile, Fed Vice Chair Lael Brainard said last week that the bank was “in this for as long as it takes to get inflation down.”
Ahead of the August CPI report, investors were pricing in a whopping 86% probability that the Fed would hike its benchmark rate by three-quarters of a percentage point for the third consecutive time, according to CME Group data.
The market saw just 14% probability of a smaller half-point hike –a increase that would still be higher than normal.
Stocks have moved lower in recent months in a sign that investors are skeptical about the Fed’s ability to achieve a “soft landing” for the US economy. To achieve a soft landing, the Fed would need to lower inflation with rate hikes without upending the labor market or hurting economic growth.
Several notable figures, including “Big Short” hedge fund sage Michael Burry and famed investor Jeremy Grantham, have warned a major stock market plunge is already underway.
Meanwhile, President Biden, Treasury Secretary Janet Yellen and others are adamant that the US economy is not in a recession, despite GDP reports that have shown declines in two straight quarters.
In a Sunday interview, Yellen pointed to ongoing strength in the labor market while arguing the underlying economy is healthy. At the same time, she acknowledged a “risk” that gas prices could surge again later this year on uncertainty related to the Russia-Ukraine war.
“The Fed is going to need great skill and also some good luck to achieve what we sometimes call a soft landing,” Yellen told CNN.
“I believe there is a path to accomplishing that,” she added.
