US consumer prices accelerate in August, push Fed closer to rate hike

U.S. consumer prices surged in August, with a significant rise in underlying inflation, signaling the Federal Reserve may hike interest rates soon. The Labor Department's Consumer Price Index report on Friday followed strong readings in several Producer Price Index components released on Thursday, which feed into key inflation measures. Economists believe personal consumption expenditures inflation, excluding volatile food and energy categories, accelerated in August.

Financial markets initially anticipated a 91% chance of a quarter-point rate hike at the Federal Reserve's meeting on Tuesday and Wednesday. However, this optimism faded to 87%, according to the CME's FedWatch tool, up from 72% on Thursday. The Fed's target interest rate currently sits between 3.50% and 3.75%.

Most economists believe the more robust inflation data, coupled with signs of a labor market recovery in August, will prompt Fed officials to raise borrowing costs during the meeting on Wednesday and possibly again in October or December. This comes as the Iran war persists, potentially spreading energy shocks throughout the economy, and as artificial intelligence development drives inflation. Crude oil prices surpassed $100 per barrel, while diesel prices in the U.S. exceeded $6 per gallon for the first time.

The Federal Reserve is now more likely than not to raise its policy rate, as allowing an energy shock to become a broader economic issue is undesirable, according to Sung Won Sohn, a finance and economics professor at Loyola Marymount University. U.S. consumer prices increased 0.4% last month, up from 0.1% in July, and consumer inflation rose 3.4% over the past year, in line with economists' expectations.

A 3.9% jump in gasoline prices, after two straight declines, accounted for more than a third of the month's CPI increase. Other motor fuels surged 9.6%, a 44% year-on-year increase in August.

However, some relief came for consumers at the supermarket, with food prices edging up 0.1% for a second straight month, while grocery prices remained unchanged amid modest increases in meat and fish costs. Fruit and vegetable prices fell 0.4% due to a Cyclospora outbreak, but egg prices rose 2.9%, and nonalcoholic beverage and dairy costs increased.

Year-over-year food prices advanced 2.7%, outpacing wage growth, which fell 0.3% in August. This is the longest income squeeze since 2012, excluding the post-pandemic period when public assistance maintained income growth despite historical job losses.