U.S. consumer prices rose 3.4% in August from a year earlier, the Labor Department reported Friday, raising expectations that the Federal Reserve will raise interest rates next week. Annual inflation remains stubbornly high, unchanged from the previous month.
The Consumer Price Index increased 0.4% from July to August, in line with economists’ expectations. But underlying inflation was hotter than expected.
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Core prices, which exclude volatile food and energy costs, rose 0.3% in August, above economists’ forecast for a 0.2% increase.
Gas prices continue to climb, rising 3.9% in August. This jump drove more than one third of the monthly overall price index increase, Friday’s report found.
Prices for shelter, communication, lodging away from home, airfare and used cars and trucks increased last month, while prices for medical care and motor vehicle insurance decreased.
The report is likely to carry unusual weight at the Federal Reserve, which meets Tuesday and Wednesday to decide whether to raise its benchmark interest rate from its current range of 3.50% to 3.75%.
“This raises the odds that the Fed will raise rates,” Jon Hilsenrath, senior advisor at the financial services firm StoneX, told Straight Arrow. “The market expects it. Bond yields are rising, and holding [rates] would be a big risk given expectations.”
Investors entered Friday increasingly betting on a rate hike after a string of relatively strong economic reports.
Following Thursday’s producer-price report, which measures the selling prices domestic producers receive, financial markets were putting the probability of a quarter-point rate increase at about 70%. That probability rose after Friday’s inflation report.
The Fed will release its rate decision on Wednesday, Sept. 16.
Friday’s inflation figures strengthen the case for a rate increase, particularly because core prices rose more than expected. Higher rates are intended to cool borrowing and spending and bring inflation closer to the Fed target of 2%.
The report comes a week after a stronger-than-expected jobs report from the Labor Department. Employers added 162,000 jobs in August, the largest gain in five months and far above economists’ forecasts. The unemployment rate held steady at 4.1%.
Those jobs numbers provided fresh evidence of a resilient labor market, despite high borrowing costs. It also gave the Fed more latitude to focus on bringing down inflation through a possible rate increase.
Fed officials have sent mixed signals about the September decision.
However, one of those policymakers, Gov. Christopher Waller, said recently that while he leans toward keeping interest rates steady, he will be closely following the latest inflation data.
Friday’s release is the last major inflation reading policymakers will have before their rate decision Wednesday.
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