Inflation rose in August as gasoline prices rose and accommodation costs remained strong, but price growth in key sectors remained modest, according to consensus economist forecasts.
The August inflation data is one of the last reports before the Federal Reserve’s policymaking committee meets on Sept. 19-20 to decide whether another interest rate hike is needed to beat inflation. A report in line with forecasts will encourage the central bank to keep rates at current levels, economists said.
The Labor Department will release consumer price index data at 8:30 a.m. Wednesday.
Economists forecast CPI to rise at a 3.6% annual rate in August, which is expected from consensus.
FactSet
That was up one step from the 3.2% pace recorded in July. This marks the second straight monthly increase in inflation. This is a reflection of gas price increases and how price growth is calculated compared to prices a year ago.
On a month-on-month basis, economists said inflation rose 0.6% in August, up from 0.2% in July.
Core CPI, which excludes volatile food and energy indices and is considered a better gauge of price growth, is expected to remain unchanged in August. Economists forecast inflation to rise 0.2% in August, matching July’s increase and slowing to a 4.3% annual rate, down from 4.7% in July.
The Federal Reserve is raising interest rates sharply, pushing inflation to 9.1 percent in June 2022, the fastest annual rate increase in four decades. The 0.2% monthly growth rate gives Fed officials comfort that they are on track to meet their 2% target for annual inflation, wrote Andrew Patterson, senior economist at Vanguard.
That should keep Fed officials on track to keep rates at the current 5.25-5.5% range at the upcoming meeting, which investors widely expect. As of Tuesday afternoon, investors were bullish on a 93% chance of no rate hike in September. CME FedWatch tool.
For the Fed, the most encouraging signs are where inflation is likely to continue. High energy prices in August led to a 6.6% month-on-month increase in gasoline prices, after AAA data showed that the headline index increased. But given their volatile nature, gas prices generally give little indication of where broader inflation is headed. And the impact of high gas prices on other sectors is minimal, said Alex Pele, US economist at Mizuho Securities – although that risk increases as energy prices rise.
The biggest contributor to price growth in August was accommodation, which in July contributed to more than 90% growth in the overall index for the month. But with the recent easing of rents – not yet reflected in government data – the number of accommodation units will still shrink significantly in the coming months.
It will be useful to look carefully at other parts. Air fares, which have seen a sharp drop in the past two months, are unlikely to decline further, putting significant pressure on the index’s performance. Commodity prices are on track to continue their decline, although perhaps at a slower pace than in July.
Bank of America
Economists predict that new car prices will increase.
Health insurance costs, meanwhile, are set to begin rising as measured by the CPI, when sectoral pricing is readjusted this fall. That adjustment would erase a Covid-era anomaly that made health-insurance inflation appear artificially low and boost overall price growth.
Overall, the data should reflect a slowdown from the red-hot inflation that has characterized the economy over the past two years. But it also underscores how difficult it will be to bring inflation back to the Fed’s 2% annual growth target, with some stubborn areas of inflation remaining.
“In our view, after no hike in September, the Fed will make one final hike in November, with strong inflation prints and building risks to inflation next year.”
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Economists led by Andrew Hollenhorst wrote ahead of the CPI report.
Write to Megan Cassella at [email protected]
