WASHINGTON, Sept 11 - U.S. consumer prices accelerated in August as gasoline costs recovered after two months of declines, supporting market expectations that the Federal Reserve may opt to raise interest rates at its meeting next week.
The Labor Department's Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 0.4% in August following a 0.1% increase in July. On an annual basis, consumer inflation advanced 3.4% in the 12 months through August, unchanged from July.
When volatile food and energy items are excluded, the so-called core CPI increased 0.3% in August after a 0.2% rise in July. The year-on-year gain for core CPI was 2.4% in August, down from 2.5% in July.
The Federal Reserve uses the Personal Consumption Expenditures (PCE) price indexes as its primary inflation gauge for the 2% target. Separate government data released on Thursday showed the Producer Price Index (PPI) rose in August, with strong increases in several components that feed into PCE calculations. That PPI report, together with a robust August employment report published last week, has strengthened expectations among investors that the Fed may tighten policy.
Oil markets have added to upward pressure on prices. Oil prices climbed back above $100 a barrel on Thursday, and diesel prices reached record highs. Those moves suggest inflationary pressures could remain elevated and broaden beyond isolated categories.
Some economists noted that tariffs on imports - most recently those affecting Canada, one of the United States' top trading partners - could contribute to persistent price pressures. Public dissatisfaction with higher prices, particularly for gasoline and food, has been cited as eroding President Donald Trump’s approval ratings and could affect his party's prospects for retaining control of Congress in the November midterm elections.
Following the August PPI data, economists' forecasts for the monthly change in the core PCE price index for August ranged from 0.15% to 0.28%. Core PCE inflation rose 0.2% in July. Estimates for the year-on-year increase in core PCE for August ranged from 3.2% to 3.3%. Core PCE inflation was 3.3% in the 12 months through July.
The August PCE inflation report will incorporate methodological changes, which some economists expect could lower the reported core inflation rate by a couple of basis points.
Ahead of the CPI release, financial markets priced in roughly a 70% probability of a 25 basis-point rate increase at the Fed's September 15-16 policy meeting, according to the CME Group's FedWatch tool. The Fed's target range for the federal funds rate is currently 3.50% to 3.75%.
Fed Governor Christopher Waller had recently suggested he would lean toward keeping rates unchanged if incoming data confirmed that inflation pressures were cooling, which earlier reduced the perceived odds of a hike. However, the confluence of a firmer PPI reading and a strong jobs report pulled those odds back up.
Public commentary and political pressure have also featured in market discussions. Fed Chairman Kevin Warsh last month warned that the central bank would have "work to do" if policymakers lacked confidence that inflation was trending down toward 2%. Meanwhile, President Trump has publicly urged the Fed to lower rates, posting last week: "LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT." Economists have attributed a portion of the surge in yields on long-term U.S. government bonds to what they described as political intimidation.
Given these developments, some market participants expected the Fed to tighten policy at its next meeting to assert its independence from political pressure.
Overall, the August CPI report confirms that headline inflation reaccelerated on a monthly basis, while core inflation showed a modest month-to-month pickup but a slight cooling on a year-on-year basis. The combination of higher producer costs, elevated energy prices, and strong labor market data has increased the likelihood of a September rate move in the eyes of many investors and analysts.