A surprise rise in a measure of underlying inflation last month dampened hopes of a big interest rate cut at the Federal Reserve's meeting next week.
According to the U.S. Bureau of Labor Statistics, the consumer price index rose 2.5% in August from a year earlier and 0.2% from the previous month, in line with economists' expectations.
But core CPI, which excludes volatile food and energy prices, rose 3.2% from a year ago and 0.3% from the previous month, slightly above expectations for a 0.2% increase as home prices remained high.
The latest figures pave the way for the Fed to go ahead with its rate cut plans next week, but the unexpectedly high core inflation figure dampened hopes for a 50 basis point (equivalent to half a percentage point) cut that some traders had been hoping for, rather than the more common 25 basis point cut.
Investors had been hoping for a rate cut, especially after a weak jobs report and fears of a market crash led to heavy stock selling last month.
Inflation hit a 40-year high of 9.1% in June 2022 as the economy recovered from the pandemic-induced recession with unexpected speed and strength.
The Federal Reserve responded with 11 rate hikes in 2022 and 2023, raising its key interest rate to its highest level in 23 years and significantly raising lending costs across the economy.
The latest inflation figures could have implications for the final week of the presidential election, as former President Donald Trump has blamed Vice President Kamala Harris for a spike in inflation that began in early 2021 when global supply chains crippled, creating severe shortages of parts and labor.
Harris has proposed subsidies for homebuyers and builders to lower housing prices and supports a federal ban on food price gouging, while Trump has said he would reduce overall inflation by increasing energy production.
Federal Reserve officials are growing increasingly confident that inflation is falling steadily toward their 2% target and have signaled they are shifting their focus to supporting a rapidly cooling job market.
“Overall, I see continued strong progress toward (the Fed's) inflation goal, and I expect this progress to continue through the remainder of the year,” Christopher Waller, the Fed's chief policymaker, said last week.
Waller noted that annual inflation is below 2.5 percent for more than half of the goods and services tracked by the government, suggesting price increases are generally slowing.
A big reason inflation dropped last month is that gasoline prices fell by about 10 cents a gallon in August, to a national average of about $3.29, according to the U.S. Office of Energy Inflation.
The main factor keeping inflation down in recent months has been moderating increases in food prices and rent.
Food prices are about 20% more expensive than before the pandemic, but only 1.1% higher than a year ago.
Another potential factor for the slowdown in inflation is that a growing number of new apartment construction projects are being completed, and rents for new apartments are starting to fall.
In a highly-anticipated speech last month, Fed Chairman Jerome Powell said inflation was coming under control and suggested the labor market was unlikely to be a source of inflationary pressure.
“We do not seek nor welcome a further weakening of labor market conditions,” Powell said.
With post wires
