US inflation remained stubbornly high in August, strengthening expectations that the Federal Reserve could raise interest rates next week for the first time in more than three years.
Consumer prices rose 3.4% compared with a year earlier, unchanged from July and slightly above the 3.3% increase forecast by economists polled by FactSet. The figures were released on Friday by the US Labor Department.
Higher petrol prices were a significant driver. Gasoline accounted for more than a third of the monthly increase in the consumer price index, rising 3.9% during August and standing 27.4% above its level a year earlier.
Inflation keeps pressure on the Federal Reserve
The report is likely to intensify scrutiny of the Federal Reserve as officials prepare for a two-day policy meeting on 15 and 16 September. The central bank has a 2% inflation target, meaning price growth remains well above the level policymakers want to see.
Market pricing indicated that the probability of a rate increase next week rose to 90% after the figures were published, up from 70% on Thursday, according to CME FedWatch.
Core inflation, which excludes food and energy costs, rose 2.4% over the year, slowing from 2.5% in July and matching economists’ expectations. But on a monthly basis it increased 0.3%, accelerating from 0.2% the previous month and exceeding forecasts.
The underlying figures are likely to be closely examined by policymakers for signs that higher energy costs are spreading into other goods and services. Fed chairman Kevin Warsh said in a speech at Jackson Hole last month that the central bank would “have work to do” if inflation failed to recede.
Adam Crisafulli, head of investment advisory firm Vital Knowledge, said the figures showed inflation was “still hot” and provided more than enough justification for a rate increase this month.
Energy costs continue to rise
Fuel prices have continued climbing since the period covered by the August data, as hostilities linked to the Iran war have intensified. The national average price of regular petrol reached about $4.30 a gallon on Friday, according to AAA.
Diesel, which is widely used by lorries and freight trains, rose to a record national average of $6.06 a gallon. That was more than 60% higher than the $3.71 recorded a year earlier, raising concerns that transport costs could feed through into prices across the wider economy.
The August inflation figures do not capture the full effect of the latest fuel surge. Brent crude has risen above $100 a barrel amid continuing tensions around the Strait of Hormuz.
“The challenge is that the data does not fully capture some of the inflation pressures that have emerged more recently, and there is little evidence to suggest inflation is returning to target in the near term,” said Alexandra Wilson-Elizondo, global head and co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management.
