Underlying inflation in the United States accelerated at a faster-than-expected monthly pace in August, leaving the door open for further interest rate hikes by the Federal Reserve. The core CPI (Consumer Price Index) increased by 0.3% compared to July, marking the first acceleration since February. Over the past year, it has risen by 4.3%, in line with estimates and representing the slowest increase in nearly two years.
The composite index, including energy, rose by 0.6% compared to the previous month, marking the sharpest increase over a year and reflecting rising energy prices. Gasoline costs accounted for more than half of the overall increase in August. The report reinforces concerns that the renewed momentum in the economy is fueling price pressures and that the central bank may need to do more to contain them.
The rise in the CPI was driven by rent, airfare, and car insurance costs, which saw their most significant annual increases since 1976. Prices for new cars increased for the first time in five months, while costs declined for used vehicles and admissions to concerts and movies. Excluding housing and energy, services prices increased by 0.4% compared to July, the fastest rate in five months, and 4% compared to a year ago. The Fed may overlook the rise in energy prices as it is highly cyclical. Still, it is being determined whether they will do the same for the increase in transportation services, especially after the experience in 2021. They cannot dismiss the potential for persistent inflation in the future.
Even though inflation expectations have remained contained and the labour market is mainly resilient, Americans have become more pessimistic about the economy. Prices, especially for essential goods, have remained high, forcing many people to rely on credit cards or savings to support spending. The impending resumption of student loan repayments will be a new burden for millions of borrowers.
The Producer Price Index (PPI) released the following day provided little reassurance. The PPI increased by 0.7% in August and 1.6% year-on-year, much higher than expected. Similar to the CPI, the upward pressure on the PPI largely came from a significant increase in energy prices. The energy PPI rose 10.5% for the month, driven by a 20% increase in gasoline prices. Considering that the PPI is a leading indicator of the CPI, this provides more arguments for a rate hike by the Fed.