Consumer price index rose 0.4% in August and 3.4% over the past 12 months, driving up market expectations for a Federal Reserve interest rate hike next week.
The latest data suggest inflation may not have been cooling as quickly as July’s figures indicated.
The Bureau of Labor Statistics’ data on Friday showed that the core CPI—which strips out volatile food and energy costs—jumped 0.3% for the month, beating forecasts.
What’s driving inflation?
Gasoline prices surged 3.9% last month, accounting for over a third of total inflation, while diesel reached a record average above $6 a gallon. Energy prices rose 27.4% over the past year.
Food prices rose 0.1% monthly and 2.7% annually. Additional increases included shelter (0.3%), transportation services (0.5%), used vehicles (0.4%), and new vehicles (0.3%).
Motor vehicle insurance fell 0.8%, while apparel was flat.
What would Warsh do?
While Fed Reserve Chair Kevin Warsh has been silent about the rate hikes, inflation moving away from the central bank’s 2% target needs some measures to bring it back under control. The Fed seems on track for its first rate hike in three years to curb cost pressures.
Markets are mostly pricing in a quarter-point increase.
The move creates a political quandary for Warsh, whom President Donald Trump picked expecting him to cut rates. Hiking rates now would clash with what the president wants. Yet high prices could also prove politically costly as the midterm elections approach.
Following the BLS report, CME Group’s FedWatch tool showed the odds of a quarter-percentage-point rate hike jumping from nearly 70% to almost 90%.