By Andrew Moran
The U.S. annual inflation rate came in at 8.3 percent in August, higher than the market forecast of 8.1 percent, according to the Bureau of Labor Statistics (BLS). This is slightly down from the 8.5 percent reading in July.
The core inflation rate, which strips the volatile food and energy sectors, also advanced to 6.3 percent last month. This was also higher than the market expectation of 6.1 percent and up from 5.9 percent in July.
On a monthly basis, the consumer price index (CPI) rose 0.1 percent, while the core CPI surged 0.6 percent.
Food and shelter costs contributed to the inflation numbers as they increased 11.4 percent and 6.2 percent, respectively, year-over-year.
The energy index eased to 23.8 percent, new vehicles surged 10.1 percent, used cars and trucks jumped 7.8 percent, and apparel edged up 5.1 percent.
Transportation services soared 11.3 percent and medical care services swelled 5.6 percent.
Within the food index, most items were up on both a year-over-year and month-over-month basis.
Bread prices rose 16.2 percent from the same time a year ago, milk soared 17 percent, eggs spiked 39.8 percent, and fruits and vegetables surged 9.4 percent.
BLS data further showed that meat was mostly up across the board, with uncooked ground beef up 7.8 percent, chicken jumping 16.6 percent, ham rising 9.2 percent, and pork surging 6.8 percent.
On the energy front, prices eased considerably from July to August. Fuel oil slipped 5.9 percent, motor fuel declined 10.5 percent, and propane and kerosene dipped 0.9 percent. However, electricity prices added 1.5 percent.
A broad array of goods and services continued climbing in August. Men’s apparel rose 4.8 percent, dental services surged 4.7 percent, postage climbed 3 percent, and major appliances edged up 2.2 percent.
The financial markets cratered on the news in pre-market trading, with the Dow Jones Industrial Average down more than 500 points. The S&P 500 shed more than 1.2 percent and the Nasdaq Composite Index shed about 225 points.
Investors are worried that the Federal Reserve will continue raising interest rates and might be more aggressive in its monetary tightening efforts.
Jan Szilagyi, the CEO and co-founder of investment firm Toggle AI, says that investors will now be monitoring the pace of declining inflation rather than the peak.
“This was last big piece of economic data on the way before the Fed meets next week to decide its next interest-rate move,” he stated in a note. “Because core inflation also came in higher than expected – 6.3% vs. 6% – the focus for investors will now be the pace of decline rather than the peak. The assumption is that the worst of inflation is behind us but has it been entrenched, and will it require a longer (and more aggressive) tightening to conquer it.”
The latest CPI numbers come after the Federal Reserve Bank of New York’s Survey of Consumer Expectations (SCE) found that one-year consumer inflation expectations fell to 5.7 percent in August, down from 6.2 percent in July.
Will the Fed Ease Policy?
Financial markets have cheered anytime there is the slightest hint of easing inflationary pressures because investors think this would prompt the Federal Reserve to slow down its pace of rate hikes or to cut interest rates.
Central bank officials have repeatedly stated that they do not intend to turn dovish during this tightening cycle until there is clear evidence that inflation is on a downward trend.
“We are in this for as long as it takes to get inflation down,” Fed Vice Chair Lael Brainard recently told a banking conference.
Speaking at a conference in Vienna last week, Fed Governor Chris Waller thinks the benchmark policy interest rate will need to climb above 4 percent if inflation fails to moderate. Despite the slower growth in the CPI and personal consumption expenditures (PCE) price index, Waller believes inflation remains “too elevated.”
“Inflation is widespread, driven by strong demand that has only begun to moderate, by an ongoing lag in labor force participation and by supply chain problems that may be improving in some areas but are still considerable,” he said in prepared remarks.
Fed Chair Jerome Powell spooked financial markets last month when he told the Jackson Hole Economic Symposium that households and businesses need to brace for “some pain.”
“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
While the Fed acknowledged that it cannot address the supply side of the current inflationary environment, the institution’s leaders are targeting the demand portion of 40-year high inflation. This is already being seen in the U.S. real estate market, which industry observers aver has slipped into a recession.
Jason Brady, the president and CEO of Thornburg Investment Management, agrees that the Fed is unlikely to reverse its hawkish tightening, even if it results in an economic downturn.
“The Fed began gambling with the economy after adjusting their framework a few years ago. They realize now that they lost the script and as market participants, we’re paying for this gamble as the Fed works to get inflation under control. We shouldn’t lose sight of the fact that we’re in the middle of a Fed gamble—a bet that they lost,” he wrote in a research note. “I think the Fed is much more likely to remain aggressive about fighting inflation than collapsing under the weight of economic pain.”
According to the CME FedWatch Tool, most of the market widely expects the central bank to pull the trigger on a 75-basis-point rate hike at this month’s Federal Open Market Committee (FOMC) policy meeting.
If this happens, investors can most likely expect a half-point increase at the next rate-setting Committee policy meeting, notes Ipek Ozkardeskaya, a senior market analyst at Swissquote Bank.