Soaring gas prices seen boosting U.S. consumer inflation in August

U.S. consumer prices likely accelerated in August as the cost of gasoline rebounded after two straight monthly declines, which would reinforce financial market expectations that the Federal Reserve could raise interest rates next week.

The Labor Department’s Consumer Price Index report on Friday would follow strong readings in several key components of the Producer Price Index released on Thursday that feed into the Personal Consumption Expenditures price indexes, the inflation measures the U.S. central bank tracks for its 2-per-cent target.

Last week’s robust employment report for August boosted rate hike prospects after the odds diminished following comments by Fed Governor Christopher Waller at a Reuters NEXT Newsmaker event that he was inclined to argue in favour of keeping rates steady if data confirmed inflation pressures were cooling.

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With oil prices climbing back above US$100 a barrel, inflation was set to remain elevated and broaden out, economists said. Others saw price pressures persisting because of tariffs on imports, most recently against Canada, one of the United States’ top trade partners.

“What were thought to be temporary factors keeping inflation high now look to be persistent. The war-induced energy shock is now in its seventh month with no end in sight,” said Joe Brusuelas, chief economist at RSM.

“The impact of tariffs on inflation, thought to be more of a one-time pass-through, is proving to be more enduring as the administration continues to use tariffs as a cudgel to obtain its political objectives in an ad-hoc fashion.”

The CPI likely increased 0.4 per cent last month after edging up 0.1 per cent in July, a Reuters survey of economists predicted. In the 12 months through August, consumer inflation was forecast to have advanced 3.4 per cent, matching July’s gain. Gasoline prices averaged US$4.192 a gallon in August, up from US$4.064 in July, data from the U.S. Energy Information Administration showed.

A moderate rise was expected for food prices over the month, though the year-on-year increase was likely to stay around 3.0 per cent.

Frustration over higher prices, especially for gasoline and food, has led to a sharp erosion in President Donald Trump’s approval ratings and could cost his Republican party control of the U.S. Congress in November midterm elections.

Tame core CPI reading expected

Excluding the volatile food and energy components, the CPI is expected to have increased 0.2 per cent after a similar gain in July. The anticipated tame rise in the so-called core CPI inflation would reflect a moderation in rents, apparel prices as well as new motor vehicles among other categories.

But higher jet fuel prices likely kept airfares elevated.

In the 12 months through August, core CPI inflation is forecast to have increased 2.4 per cent after advancing 2.5 per cent in July. It is running below core PCE inflation. Following Thursday’s PPI data, economists’ estimates for August’s core PCE price index ranged from as low as a 0.15-per-cent gain to as high as a 0.28-per-cent increase. Core PCE inflation rose 0.2 per cent in July.

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Estimates for the year-on-year increase in core PCE inflation ranged from 3.2 per cent to 3.3 per cent. Core PCE inflation advanced 3.3 per cent in the 12 months through July. The August PCE report will include changes to the methodology, which some economists say could lower the core inflation rate by a couple of basis points.

Financial markets were on Thursday pricing in a roughly 70-per-cent chance of a 25-basis-point rate hike at the Fed’s September 15-16 policy meeting, according to CME’s FedWatch tool. The Fed’s benchmark overnight interest rate is currently in a 3.50 per cent to 3.75 per cent range. Fed Chairman Kevin Warsh last month said the central bank will “have work to do” if policy-makers don’t get the confidence they need that inflation is heading down to 2 per cent.

But Trump is pressuring the Fed to cut rates, posting on social media last week “LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT.” Economists have blamed what they called political intimidation for the surge in yields on long-term U.S. government bonds. Some expected the Fed to tighten policy next Wednesday to underscore its independence.

“A rate hike by the Fed on Sept. 16 would now be a strong statement underscoring the institution’s independence and, without seeing the August inflation data, that is what I expect the Fed to do,” said John Ryding, chief economic adviser at Brean Capital.