By Lucia Mutikani
WASHINGTON- US consumer prices rose slightly in August, but underlying inflation showed some stickiness amid higher costs for housing and other services, further dashing hopes of a half-point interest rate cut from the Federal Reserve next week.
The mixed inflation report from the Labor Department on Wednesday followed data last week showing the labor market still cooling in an orderly fashion in August, defying fears of a sharp deterioration, with the unemployment rate retreating from a near three-year high touched in July.
Financial markets boosted the chances of a quarter-point rate cut next Wednesday and sharply lowered the probabilities of a 50 basis point reduction.
“The road to normal inflation hit a bump in August as lingering pressures for housing and service costs once again cropped up,” said Ben Ayers, senior economist at Nationwide. “This should clinch a smaller, 25 basis points rate cut from the Fed next week as Fed officials remain wary to feed any lingering price momentum for the economy.”
The consumer price index increased 0.2 percent last month after rising by a similar margin in July, the Labor Department’s Bureau of Labor Statistics said. The rise in the CPI was in line with economists’ expectations.
Food prices edged up 0.1 percent after climbing 0.2 percent in each of the past two months. Grocery store food prices were unchanged as increases in the costs of meats, fish, eggs and dairy products were offset by decreases in the prices of nonalcoholic beverages, fruits and vegetables.
The costs of energy products dropped 0.8 percent after being unchanged in July. Gasoline prices fell 0.6 percent , while electricity was 0.7 percent cheaper and natural gas cost 1.9 percent less.
In the 12 months through August, the CPI advanced 2.5 percent . That was the smallest year-on-year rise since February 2021 and followed a 2.9 percent increase in July.
Prices increased at a 1.1 percent annualized rate in the past three months, indicating that a disinflationary trend was now firmly entrenched, allowing policymakers to focus more on the labor market in their quest to sustain the economic expansion.
The US central bank, which has a 2 percent inflation target, tracks the Personal Consumption Expenditures price (PCE) indexes for monetary policy. Government data last week showed nonfarm payrolls increasing below expectations in August but the unemployment rate falling to 4.2 percent from 4.3 percent in July.
The labor market is cooling amid a significant moderation in hiring, reducing the risks of inflation reigniting. In addition, oil prices have dropped and supply chains have improved considerably. Market rents continue to trend lower, which suggest the official rent measures will move down at some point.
Financial markets saw a roughly 15 percent probability of a 50 basis points rate cut at the Fed’s Sept. 17-18 policy meeting, down from 29 percent before the CPI data was published, according to CME Group’s FedWatch Tool. The odds of a quarter-point rate reduction were around 85 percent , up from 71 percent earlier.
The central bank has maintained its benchmark overnight interest rate in the current 5.25 percent -5.50 percent range for a year, having raised it by 525 basis points in 2022 and 2023. – Reuters
