US consumer inflation picks up in August

By Lucia Mutikani

WASHINGTON, Sept 11 (Reuters) – U.S. consumer prices accelerated in August, while a key measure of underlying inflation posted its largest increase in four months, reinforcing expectations that the Federal Reserve will raise interest rates next week.

The Labor Department’s Consumer Price Index report on Friday followed strong readings in several components of the Producer Price ‌Index released on Thursday that feed into the Personal Consumption Expenditures price indexes, the inflation measures the U.S. central bank tracks for its 2% target. Soon after the CPI data ‌was published, financial markets priced in a roughly 91% chance of a rate hike next week, up from about 72% on Thursday, CME’s FedWatch tool showed.

“It wasn’t as hot as yesterday’s PPI, but today’s CPI left the Fed with less room to ​maneuver as it tries to maintain its inflation-fighting credentials,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.

The Consumer Price Index increased 0.4% last month after edging up 0.1% in July, the Labor Department’s Bureau of Labor Statistics said. In the 12 months through August, consumer inflation advanced 3.4% after rising by the same margin in July. The rise in the CPI was in line with economists’ expectations.

A 3.9% jump in gasoline prices after two straight monthly declines accounted for more than a third of the increase in the CPI over the month. Other motor fuels, which include diesel, surged 9.6%. Oil prices have climbed back ‌above $100 a barrel, while diesel prices are at record highs, suggesting inflation ⁠was set to remain elevated and broaden out in the coming months.

There was some respite for consumers at the supermarket. Food prices edged up 0.1% for a second straight month. Grocery prices were unchanged amid muted increases in the prices of meat and fish. Fruit and vegetable prices fell 0.4% over the ⁠month, weighed down by a 6.2% drop in the cost of lettuce because of a Cyclospora outbreak.

But egg prices increased 2.9%, while nonalcoholic beverages cost more as did dairy and related products. With diesel prices at a record high, consumers could soon face higher prices at the supermarket as nearly all the goods are transported by road, economists warned. Some saw price pressures persisting because of tariffs on imports, most recently against Canada, one of the ​United ​States’ top trade partners.

Frustration over higher prices, especially for gasoline and food, has led to a sharp erosion in ​President Donald Trump’s approval ratings and could cost his Republican party control of ‌the U.S. Congress in the November midterm elections.

CORE INFLATION HIGHER OVER THE MONTH

Excluding the volatile food and energy components, the CPI rose 0.3% last month, the largest increase since April. That was above economists’ expectations for a second straight month of a 0.2% gain. The so-called core CPI increased 2.4% year-on-year in August after rising 2.5% in July. Core CPI inflation was over the month driven by a 2.7% increase in airline fares amid rising jet fuel costs.

There were also solid increases in the prices of education, communication as well as used cars and trucks. Rents rose 0.2% while the cost of hotel and motel rooms rebounded 2.4%. But healthcare costs eased while prices for prescription medication were unchanged. The cost of motor vehicle insurance fell 0.8% while apparel prices were unchanged.

With the CPI and PPI data ‌in hand, economists’ estimates for August’s core PCE price index converged around a 0.28% increase, which would round up ​to 0.3%. Core PCE inflation rose 0.2% in July. Estimates for the year-on-year increase in core PCE inflation ranged from ​3.2% to 3.3%. Core PCE inflation advanced 3.3% in the 12 months through July.

The August PCE ​inflation report will include changes to the methodology, which some economists say could lower the core inflation rate by a couple of basis points. The Fed’s ‌benchmark overnight interest rate is currently in a 3.50%-3.75% range.

The dollar was little ​changed against a basket of currencies. U.S. Treasury yields ​initially rose after the inflation data before pulling back.

The odds of a rate increase had diminished following comments by Fed Governor Christopher Waller at a Reuters NEXT Newsmaker event last week that he was inclined to argue in favor of keeping rates steady if data confirmed inflation pressures were cooling. Fed Chairman Kevin Warsh last month said the central bank will “have work ​to do” if policymakers don’t get the confidence they need that inflation ‌is heading down to 2%.

But Trump is pressuring the Fed to cut rates, posting on social media last week “LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH ​WE HAVE A DEFICIT.” Economists have blamed what they called political intimidation for the surge in yields on long-term U.S. government bonds. Some expected the Fed to tighten ​policy next Wednesday to underscore its independence.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci )