U.S. inflation unexpectedly rose in August, despite a drop in gas prices. That sparked a sharp selloff in the stock market, snapping a four-day winning streak for the major indexes
The surprisingly firm inflation readings reported by the Labor Department on Tuesday were despite an easing in global supply chains, which had contributed to a surge in prices earlier in the year. With a resilient labor market supporting strong wage growth, inflation has probably not peaked, keeping the Fed on an aggressive monetary policy path for a while.
Economists polled by Reuters had forecast the CPI dipping 0.1%. In the 12 months through August, the CPI increased 8.3%. That was a deceleration from July's 8.5% rise and a 9.1% jump in June, which was the biggest gain since November 1981. Inflation has overshot the Fed's 2% target. Fed officials gather next Tuesday and Wednesday for their regular policy meeting. Financial markets have priced in a 75 basis points rate increase next Wednesday, with potential for a full percentage point, according to CME's FedWatch Tool.
Some of the price pressures are coming from the labor market, where the Fed is trying to dampen demand for workers. Excluding the volatile food and energy components, the CPI rose 0.6% in August after advancing 0.3% in July. Economists had forecast the so-called core CPI increasing 0.3%. "While private sector measures of rent growth suggest the corresponding CPI categories may be close to peaking on a monthly basis, the slow-moving nature of primary rent and OER in the CPI data suggest housing will continue to provide a sizable boost to core inflation in the coming months," said Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina.
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