US Consumer Inflation Accelerates in August

Source Credit : Reuters

U.S. consumer prices increased by the most in seven months in August amid higher costs for housing and food, but a surge in first-time applications for jobless benefits last week kept the Federal Reserve on track to cut interest rates next Wednesday.

The larger-than-expected rise in the Consumer Price Index reported by the Labor Department on Thursday resulted in the biggest year-on-year increase in inflation since January. Higher inflation and softening labor market conditions fanned fears of stagflation, and pose a dilemma for the U.S. central bank, beyond Wednesday's anticipated rate decision.

The broad increase in inflation partly reflected businesses passing on higher costs from President Donald Trump's sweeping tariffs to consumers and a rebound in demand for travel. Tourist traffic to the U.S. tanked during the spring and early summer amid boycotts and the White House's immigration crackdown.

"Even though a September cut is a fait a compli, the future trend looks less certain," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University.

"The interaction of rising inflation and softening employment creates a difficult policy dilemma for the Fed. Cutting rates too quickly risks embedding tariff-driven inflation, while delaying cuts risks amplifying unemployment."

The CPI rose 0.4% last month, the biggest gain since January, after increasing 0.2% in July, the Labor Department's Bureau of Labor Statistics said. The CPI was driven by a 0.4% jump in the cost of shelter. Food prices increased 0.5%, with prices at the supermarket soaring 0.6%.

Fruit and vegetable prices increased 1.6% as tomatoes surged 4.5%, the biggest gain since January 2020. Apples and bananas were also more expensive. Beef prices rose 2.7% and increased 13.9% from a year ago. Coffee prices jumped 3.6% and were up 20.9% from a year ago. Tariffs likely accounted for some of these increases. Past droughts that decimated the national herd were also probably behind the higher beef prices.

Labor shortages at farms as the Trump administration rounds up undocumented migrants for deportation were also adding to higher food prices, economists said. Gasoline prices rose 1.9%.

In the 12 months through August, the CPI advanced 2.9%, the largest increase since January, after climbing 2.7% in July.

Economists polled by Reuters had forecast consumer prices would rise 0.3% in August and increase 2.9% on a year-over-year basis.

Financial markets have fully priced in a quarter-percentage-point reduction in rates next Wednesday, with the Fed expected to deliver two similar-sized additional cuts this year.

The U.S. central bank, which tracks the Personal Consumption Expenditures (PCE) price indexes for its 2% inflation target, paused its easing cycle in January because of uncertainty over the inflationary impact of import duties.

The pass-through from import duties has been gradual, but businesses have now depleted their pre-tariff inventories. Business surveys have for some time been signaling imminent price increases. Economists were divided on whether the pass-through from tariffs would be a one-off event or prolonged.

Stocks on Wall Street rose. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.