Key Takeaways
- Inflation cooled in August, but rent bucked the overall price trend, rising fast and pushing a key inflation measure higher than forecasters had expected.
- Price trends were more favorable for gas, food, and cars, among other items, showing that inflation is generally letting up.
- The uptick in rent dampened expectations that the Federal Reserve would cut its key interest rate agressively at its meeting next week.
Prices for gas, food, and other important consumer items fell or stayed flat in August, but stubbornly rising rents kept inflation from cooling down as much as it might have otherwise.
Overall prices for consumer items rose 2.5% over the last 12 months in August, down from a 2.9% annual increase in July and reaching its lowest since February 2021, the Bureau of Labor Statistics said Wednesday. It dropped more than the 2.6% forecasters had expected, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.
But rent inflation reaccelerated, with shelter costs rising 0.5% in August from July, the second acceleration in as many months. This pushed up “core” inflation to a higher level than forecasters had anticipated.
Core inflation, a measure that excludes volatile prices for food and energy, rose 0.3% in August from July, higher than the 0.2% increase forecasters had anticipated. However, the yearly core inflation rate was in line with expectations at 3.2%. The bureau said the jump in rental costs accounted for most of the increase in core inflation.
What Does This Mean For The Federal Reserve?
The hotter-than-expected core inflation reading could be a slight setback for the Federal Reserve’s battle against inflation.
The Fed has held its benchmark interest rate at a 23-year high for more than a year in an effort to push inflation down to its goal of a 2% annual rate. With inflation having fallen significantly in recent months, Fed officials are preparing to start a series of rate cuts next week, aiming to boost the economy and prevent the job market from deteriorating.
The stubbornly high core inflation reading increase diminished financial markets’ expectations that the Fed would open its rate-cutting campaign with a large 50-basis-point cut. After the report, investors were pricing in an 85% chance the Fed would opt for a smaller, 25-basis-point cut instead, up from 71% just ahead of the report, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
“The unwelcome news on inflation will distract slightly from the Fed’s renewed focus on the labor market and makes it more likely that officials stick with a more measured approach to easing, beginning with a 25bp cut next week,” Michael Pearce, deputy chief U.S. economist at Oxford Economics, wrote in a commentary.
Despite Rent Pressures, Prices Are Easing
Despite the disappointing outlook for rate cuts, Wednesday’s inflation report showed that pressure on household budgets continues to ease as the post-pandemic burst of inflation continues to subside.
Prices for used vehicles fell 1% in August and are down 10.4% over the year. Grocery prices stayed flat over the month and were up 2.1% over the year, similar to pre-pandemic price trends. And gasoline prices fell 0.6% over the month and were down 10.3% over the year.
Forecasters have long expected rents in official inflation measures to slow down because of a lag in the report’s measures. Market data shows rent prices have slowed significantly over the past few years. However, shelter costs in official reports, including the Consumer Price Index, have stayed stubbornly high, defying expectations.