U.S. inflation strengthens expectations of Fed rate hike

U.S. consumer price growth in August was strong enough to noticeably increase the probability of a Federal Reserve interest rate hike as early as next week. An additional surprise was a sharp jump in mobile communication costs, which pushed core inflation above forecasts.

This was reported by Bloomberg, citing data from the U.S. Bureau of Labor Statistics and the situation in financial markets.

The consumer price index rose 0.4% in August from July after rising only 0.1% a month earlier. On an annual basis, inflation remained at 3.4%.

The headline figure roughly matched economists' expectations, but core inflation, which excludes volatile food and energy prices, came in stronger than forecast. It accelerated from 0.2% to 0.3% month-over-month. On an annual basis, the core measure was 2.4% versus 2.5% in July.

One unusual factor behind August's increase was a sharp jump in wireless service prices. The cost of wireless telephone service rose by 5.9% over the month, while telephone services overall rose 5.4%. Bloomberg notes that this jump helped push the key core inflation measure above the forecast and thereby strengthened the case for a more hawkish Fed policy.

Energy also continues to have a strong impact on overall inflation. Gasoline rose 3.9% in August, accounting for more than a third of the monthly increase in the consumer price index. Energy overall rose 2.1% over the month and 16.3% over the year.

The latest data is the last major inflation report before the Federal Open Market Committee meeting, scheduled for September 15–16. After the release, traders sharply raised the probability of a 0.25 percentage point rate hike—market estimates approached 90%. Before the release, the probability of such a decision was estimated at about 70%.

Additional pressure on the Fed came from producer price data released a day earlier. In August, the producer price index rose 0.4% month-over-month and 5.4% on an annual basis, indicating persistent inflationary pressure in the U.S. economy.

The current target range for the federal funds rate is 3.50–3.75%. At its July meeting, the Fed left it unchanged, but three committee members already voted for a 0.25 percentage point increase at that time.

Thus, the September meeting may be the first in a long time when the Fed shifts from holding the rate to raising it. The regulator will announce its final decision on September 16.

Based on materials from: Bloomberg, U.S. Bureau of Labor Statistics, Federal Reserve System.