Rising petrol costs drive sharp inflation increase in US in August

In August, the cost of living in the United States rose, suggesting the Federal Reserve might raise interest rates soon. The Consumer Price Index, which measures consumer prices, increased by 0.4 percent last month after rising by 0.1 percent in July, according to the Bureau of Labour Statistics. Over the past year, consumer inflation grew by 3.4 percent, also up from July's 3.4 percent.

Economists had predicted the CPI to rise by 0.4 percent in August and by 3.4 percent annually. When food and energy costs are left out, the so-called core CPI increased by 0.3 percent in August, up from 0.2 percent in July, with a year-on-year rise of 2.4 percent in August and 2.5 percent in July. The Federal Reserve focuses on the Personal Consumption Expenditures price index for its 2 percent inflation goal.

Reports on Thursday showed an increase in the Producer Price Index, with significant jumps in several key components that influence PCE inflation. This, along with the strong employment report released last week, has increased the likelihood of a rate hike next week. Fed Governor Christopher Waller had suggested keeping rates stable if data indicated inflation pressures were easing.

Oil prices surged above $100 a barrel, and diesel costs reached record highs, indicating that inflation might stay elevated and spread out. Some economists believed price pressures would continue due to trade tariffs, particularly against Canada, a major U.S. trading partner. Growing discontent over higher prices, especially for gasoline and food, has lowered President Donald Trump's approval ratings and could threaten the Republican Party's control of Congress in the November midterms.

After the PPI data on Thursday, economists estimated August's core PCE price index to rise by 0.15 to 0.28 percent. Core PCE inflation rose by 0.2 percent in July, with estimates for its year-on-year increase ranging from 3.2 to 3.3 percent. Core PCE inflation jumped by 3.3 percent in the 12 months leading up to July. The August PCE inflation report will include changes to the methodology, which some economists claim could lower core inflation by a few basis points.

Before the CPI report, financial markets anticipated a roughly 70 percent probability of a 25-basis-point rate increase at the Fed's upcoming meeting, as per CME's FedWatch tool. The Fed's target interest rate currently sits between 3.50 percent and 3.75 percent. Fed Chairman Kevin Warsh had stated that the central bank would face challenges if policymakers did not demonstrate confidence that inflation was dropping to 2 percent.

However, President Trump is urging the Fed to lower rates, tweeting last week to "LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT". Economists have attributed the rise in yields on long-term U.S. government bonds to what they call political pressure.