The Consumer Price Index (CPI) increased by 0.4% in August, according to a Wall Street Journal survey of economists, following a 0.1% rise in July. This acceleration was largely driven by a rebound in oil and gasoline prices, which saw gasoline average $4.192 per gallon in August, up from $4.064 in July. The annual inflation rate for consumer prices is expected to remain at 3.4% for the 12 months ending in August, matching July's gain.
Excluding volatile food and energy components, core CPI is projected to have increased by 0.2% in August, similar to July's gain. Annually, core CPI is forecast to rise by 2.4% through August, a slight decrease from 2.5% in July. This moderation in core inflation is attributed to cooling rents, apparel prices, and new motor vehicle costs.
Economists emphasize that while the headline CPI is influenced by energy supply shocks, the Federal Reserve primarily focuses on core inflation for its policy decisions. Despite the headline figure, some analysts suggest that a core CPI rise of 0.2% or less might allow the Fed to look past the oil-driven spike. However, other factors like a robust August employment report and persistent geopolitical unrest in the Middle East, which has kept oil prices above $100 a barrel, are also influencing the Fed's stance.
Financial markets are pricing in a roughly 70% chance of a 25-basis-point rate hike at the Federal Reserve's September 15-16 meeting, which would move the benchmark interest rate from its current 3.50%-3.75% range. This decision will weigh the conflicting signals of a high headline CPI versus a moderating core CPI, as Fed Chairman Kevin Warsh has previously indicated the central bank "will have work to do" if inflation doesn't convincingly head towards the 2% target.
