The Federal Reserve is struggling to control prices as rising energy costs have pushed US inflation to levels above expectations in August.
According to Bureau of Labor Statistics figures released on Wednesday, consumer prices increased by 3.7% year-on-year, up from the previous month’s 3.2 percent. This is higher than the consensus estimate of 3.6 percent. Prices increased by 0.6% on a monthly basis.
The underlying price pressures also increased marginally over the past month but declined year-on-year.
The recent increase in petrol prices was responsible for more than half of this month’s price pressure. Saudi Arabia and Russia have renewed efforts to push oil prices towards $100 per barrel. Brent crude has already reached a 10-month-high at around $92.50.
The financial markets were subdued. The yield on the two-year Treasury, which is sensitive to interest rates, was flat. And the S&P 500 index fell by 0.2 percent.
Roosevelt Bowman is a senior investment strategist with Bernstein Private Wealth Management. He predicted that the Fed would “largely ignore short-term spikes in energy prices” when setting monetary policies.
He said that the central bank would “keep a sharp look” at the possible knock-on effect if the increase continues.
The focus of policymakers is on the core inflation rate, which excludes volatile energy and food prices. However, a higher headline number can impact consumption and expectations for future price increases.
Core inflation increased by a modest 0.3 percent month-on-month — slightly higher than the 0.2 percent rate for July, and higher than expected due to increases in airfares and car rental prices.
However, on an annual basis it dropped from 4.7% to 4.30%.
Gregory Daco is chief economist at EY. He said, “the most important message is core inflation is still going down.” Energy prices were expected to increase. . . “But the momentum for core remains encouraging.”
It is expected that the Fed will keep rates at their next meeting, scheduled for September 19-20. The Fed has raised rates 11 times in the past year to try to get inflation back to its target of 2 percent.
Investors are split almost equally on whether the Fed will raise interest rates again later this year.
Kristina Hooper is the chief global market strategist for Invesco. She said there were “certainly blemishes”, but that they would not be sufficient to upset the Fed’s plans next week.
She said, “I expect the Fed to be a bit hawkish and suggest that November will still be on the table.” It wants to retain the right to raise rates again if necessary.
Lorie Logan, president of the Dallas Fed, said last week that a “carefully calibrated approach” is needed to return inflation to 2%. She did not want endless buckets filled with cold water.
The labour market statistics released in this month revealed a weaker wage growth than expected and an increase in unemployment, while separate figures on job vacancies revealed a sharper decline than expected.