U.S. inflation rose sharply again in August, confounding expectations and boosting the odds of more interest rate hikes from the Federal Reserve.
The consumer price index, the market's preferred inflation metric, jumped 8.3% from August 2021 to August 2022, the Bureau of Labor Statistics reported Sept. 13. Economists had forecast an increase of 8%, according to Econoday. The increase was largely fueled by rising costs for shelter and food, although prices climbed across the economy.
The latest figures served as further indication that central bank officials' battle to stem the worst inflation in four decades is far from won.
"This is the opposite of what they were looking for," said Joseph Politano, who writes an independent newsletter, Apricitas Economics.
Across the board
Expectations for a smaller increase in inflation were largely driven by the recent decline in gasoline prices, which fell 12.2% from July to August. Gasoline makes up only about 4% of the total weight of the consumer price index, or CPI. Shelter, which makes up about 33%, increased 6.2% from August 2021 to August 2022.
"The statistical composition of CPI is going to make it slower to decline than I think many people would otherwise hope," said Tom Essaye, a trader and founder of financial research firm The Sevens Report.
While many expenditures declined from July, every category in August continued to see increases from a year ago.
That included energy, up 23.8%, airline fares, up 33.4%, food with an 11.4% rise, and new vehicles, which were up 10.1%.
"Higher inflation is quite diversified in the sample size, and that is a problem," Essaye said. "There's not one thing. It's not just used cars anymore."
Forecasters likely underestimated the rise in the cost of shelter, Politano said.
No pivot yet
The result virtually locked in the odds that the Fed will raise benchmark interest rates by at least 75 basis points Sept. 21, deflating any hopes of a pivot away from the aggressive monetary policy central bank officials are pursuing.
Following the release of August inflation data, the odds that the Fed would announce a 75-bps point hike Sept. 21 were 54%, while the odds of a 100-bps hike stood at 46%, up from zero a day earlier, according to the CME FedWatch Tool, which measures investor sentiment in the Fed funds futures market. The odds of a smaller hike fell to 0% on Sept. 13 from 9% a day earlier.
The Fed has boosted its benchmark federal funds rate by 225 bps since March, enacting four separate hikes at 25 bps, 50 bps and two 75-bps raises. The futures market had 21% odds that the Fed would push the target Fed funds rate to 4%-4.25% over its next two meetings.
Regional differences
Inflation also continues to impact regions of the U.S. differently, the data shows. Year-over-year inflation in August hit 8.9% in the South but 7.4% in the Northeast.
Meanwhile, wages continued to not keep pace with rising prices.
Hourly wages rose 5.2% from August 2021 to August 2022, matching the June and July figures and down from the 5.6% year-over-year growth in March.
Even with the higher-than-expected rise, overall inflation in August fell from its year-over-year high of 9.1% in June.
"From a market standpoint, today's number was certainly a disappointment, but at the same time, it doesn't take away from the fact that inflation has likely peaked and the decline will occur over the coming months," Essaye said. "It's not a disaster for the markets, but it is a reminder that we're in an uncertain period and there's going to be volatility."