US Consumer Prices Report

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer prices saw a slight increase in August, while underlying inflation showed persistence due to rising housing and service costs. This situation has diminished expectations for a significant interest rate cut from the Federal Reserve next week.

The mixed report from the Labor Department on Wednesday came after last week’s data indicated a cooling labor market in August, allaying fears of a sharp downturn. The unemployment rate fell from a three-year high in July.

Financial markets adjusted their expectations, raising the chances of a quarter-point rate cut at next Wednesday’s meeting while significantly lowering the odds of a 50 basis point cut.

“The road to normal inflation hit a bump in August due to continuous pressures on housing and service costs,” stated Ben Ayers, senior economist at Nationwide. He noted that a smaller, 25 basis points rate cut from the Fed is likely as policymakers are cautious about igniting inflationary momentum.

The Consumer Price Index (CPI) rose by 0.2% in August, maintaining a similar pace from July, aligning with economists’ forecasts. Food prices increased by 0.1%, while grocery store prices were stable due to offsetting price changes in various categories.

Energy costs decreased by 0.8%, driven by lower gasoline and electricity prices. Year-on-year, the CPI increased by 2.5%, the smallest rise since February 2021, following a 2.9% increase in July.

The CPI showed a 1.1% annualized growth rate over the past three months, confirming a disinflation trend, which allows the Fed to focus more on the labor market to sustain economic growth.

The central bank aims for a 2% inflation target and monitors the Personal Consumption Expenditures (PCE) price indexes for monetary policy decisions. Recent data indicated nonfarm payrolls increased less than anticipated in August, though the unemployment rate fell to 4.2% from 4.3% in July.

With hiring moderating significantly, the risk of inflation reigniting has reduced. Oil prices have declined, and supply chains have improved, indicating that official rent measures may decrease soon.

As a result of the CPI data, markets perceived about a 15% chance of a 50 basis points rate cut from the Fed, dropping from around 29%. Conversely, the likelihood of a quarter-point cut increased to 85%, up from 71%.

The Fed has kept its benchmark interest rate in the 5.25%-5.50% range for a year, having raised it by 525 basis points in 2022 and 2023.

Stocks on Wall Street were down, the dollar strengthened against other currencies, and U.S. Treasury prices fell.

Gradual Rate Easing

“Prospects for a gradual rate-cutting cycle should be welcomed by investors,” remarked Elyse Ausenbaugh from J.P. Morgan Wealth Management. This approach would indicate overall economic health as pandemic-related economic distortions begin to fade.

Annual consumer price growth has substantially slowed from a June 2022 peak of 9.1% due to increased borrowing costs limiting demand.

Excluding food and energy, the CPI rose by 0.3% in August, compared to a 0.2% increase in July, with the core CPI supported by a 0.5% rise in shelter costs.

While some economists noted a rise in rents, they attributed this largely to sampling errors and expected rents to slow down as market trends change.

Economists estimated the core PCE rose by 0.2% in August, corresponding with July’s gain. This forecast might adjust after upcoming producer price data.

Household insurance costs shot up by 0.8%, while airline fares increased by 3.9% after a July decline. However, healthcare costs fell for the second straight month, with service costs rising moderately.

Prices for goods continued to decline with a 0.1% drop in August, influenced by a decrease in used vehicle prices. Core goods prices faced a 0.2% drop after a similar decrease in July.

For the 12 months through August, the core CPI climbed by 3.2%, consistent with July. It rose at a 2.1% rate in the last three months.

“Overall, indicators point towards a benign inflation outlook,” stated Ian Shepherdson, chief economist at Pantheon Macroeconomics, and expressed expectations for core CPI inflation to reach 2% in the first half of 2025.