So, U.S. inflation decided to put on a show in August, thanks to soaring housing and travel costs. This makes it much harder for the Federal Reserve to justify a serious rate cut next week.
The all-important core Consumer Price Index (CPI), which skips the pesky food and energy costs, increased by 0.3% from July—the most significant jump in four months. On an annual basis, it was up by 3.2%, according to the latest stats from the Bureau of Labor Statistics.
Economists, always a glass-half-full crowd, prefer the core index as a better measure of inflation. In contrast, the overall CPI rose a more modest 0.2% from the previous month, down to a 2.5% yearly increase—largely thanks to falling petrol prices. That’s five straight months of decrease.
Housing was the primary factor behind the latest surge in inflation.
While this inflation spike won’t necessarily prevent the Fed from making a small rate cut next week, it certainly makes the chance of a more significant reduction all the more remote. Investors have all but written off the idea of a half-point drop, and as a result, Treasury yields went up, S&P futures dipped, and the dollar trimmed its losses. The FED would need more substantial evidence before starting a bigger change in its monetary policy.
The rise in prices for airfares, clothing, childcare, and even nursery schools has contributed to inflation, while car insurance and hotel stays have also become more expensive. Housing costs, which comprise the biggest portion of services, increased by 0.5%, the fastest since January.
However, the prices for goods have been relatively stable, with core goods prices dropping by 0.2%, which marks the 14th decline in 15 months.
The Federal Reserve is more concerned about wage growth. Real incomes have risen by 1.3% from last year, which is the best increase over a year, indicating that consumers may still have some disposable income.
In conclusion, inflation is a concern, and the Federal Reserve will likely proceed cautiously, making significant rate cuts unlikely for now.