Gasoline caused monthly inflation in the US to rise in August
Breaking news: US inflation rose month-on-month last month as rising motor fuel prices hurt American consumers.
The consumer price index rose 0.4% in August, the U.S. Bureau of Labor Statistics reported, up from 0.1% in July.
The annual inflation rate remained unchanged at 3.4%.
The rise in gasoline prices led to an increase in inflation in the United States in August – the gasoline index rose by 3.9% in August, which is more than a third of the monthly increase in all items.
Energy prices jumped 2.1% for the month, another sign that Donald Trump’s war with Iran is hurting consumers.
Shelter (or housing) became more expensive by 0.3%, and food prices rose 0.1% for the month, including a 0.3% rise in the eating out index (such as at restaurants).
Key events
It is far from certain that Kevin Warsh and the Fed will raise rates next week, says Professor Costas Milas from the University of Liverpool Management School.
But Donald Trump could still tip the scales if he starts lobbying against raising rates.
Prof. Milas tells us:
The likelihood of interest rates rising, according to today’s data, has shifted (in my opinion) to 55%. But if Trump starts bombarding social messages like, “Don’t raise rates” or even “Cut rates,” the Fed will definitely raise rates to send a strong signal that they are not taking “orders” from Trump.
FTSE 100 breaks losing streak, worst week in two months
Back in London, the stock market recorded its first daily gain in more than a week.
After five straight daily falls, the FTSE 100 share index ended the day up 41.5 points, or 0.4%, at 10,650.
As a result, the blue-chip share index is still down 1.67% this week, marking its worst week since July 2-6.
ING: Weakening consumer confidence is ‘a warning sign for Republicans’
The fall in US consumer confidence this month (see previous post) is a warning sign for Republicans ahead of the midterm elections, he says. James Knightleychief international economist of the company ING:
The University of Michigan’s September consumer sentiment reading was very poor, falling to 47.8 from 51.7 (consensus 51.0). This is the second weakest reading on record, and the streak dates back to the 1970s – the weakest was only in May. The damage was done by the expectations component, which fell to 45.8 from 51.5. This level has historically corresponded to real consumer spending growth of -2% year over year. We would normally be in recession territory here, but there has been a disconnect in the relationship with consumer spending due to the spending story now being dominated by high-income households.
Middle- and low-income households surveyed are under increasing financial pressure as wages fail to keep pace with the cost of living. We can also see this in low savings rates and rising delinquencies on credit cards and auto loans.
Concerning the GOP ahead of the midterm elections, it is its supporters who have seen the biggest drop in sentiment in the last 12 months, down 20 points versus a five-point decline for Democratic supporters.
City consultancy Capital Economics has concluded that the Federal Reserve will raise interest rates next week.
They say:
Hard price data for August means we confirm our previous forecast that the Fed will raise interest rates by a total of 75 bps this month. As a result, the target range for Fed funds will be from 4.25% to 4.50%.
The US telecom cost index rose 2.3% in August after rising 0.6% in July.
Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity Internationalspeaks:
“US inflation surprised in August, with core consumer price index (CPI) rising +0.29% month-on-month (m/m) and the annual rate nearly rounding to 2.4% year-on-year, up from 2.5% last month. Artificial intelligence (AI)-related components performed strongly, unsurprisingly.”
US consumer confidence falls again
US consumer confidence has fallen again as Americans grow increasingly concerned about inflation.
The just-released University of Michigan Consumer Sentiment Index fell nearly four points to 47.8 this month from 51.7 in August, the second straight month of decline.
The survey found that consumer expectations have fallen this month and that people are also more gloomy about current economic conditions.
Consumer surveys director Joan Xu explains:
Both Democrats and Republicans showed significant declines, while independents were little changed from August. Expectations for the coming year for both personal finances and business conditions have fallen sharply. With rising fuel prices and trade tensions, consumers expect their wallets to be even tighter in the future.
Overall, sentiment is now 16% lower than it was in February, before the Iran conflict, and 13% lower than a year ago. Xu added.
Investors may feel the US Federal Reserve will bolster its credentials as an inflation-fighting central bank by raising interest rates next week.
This could explain why the US stock market opened higher, explains Janet Mui, Head of Market Analysis Department at RBC Bruin Dolphin:
Markets reacted quickly as they assessed the likelihood of a rate hike next week from 70% before the CPI release to 90% immediately after. Interestingly, bond yields fell while stocks reacted positively. A likely interpretation is that if the Fed does implement a rate hike to restore confidence in inflation, it will help anchor longer-term inflation expectations and will be seen as a positive development.
Given the ECB’s rate hike, as well as recent data and market prices, it would be a surprise if the Fed remains inactive next week. If this does not happen, the Fed will face a serious credibility problem, and Fed Chairman Warsh will have to clearly explain to the market why this is happening.”
Wall Street opens higher after inflation report
The US stock market doesn’t appear to be concerned about today’s inflation report or the growing likelihood of an interest rate hike next week.
Dow Jones industrial average jumped 622 points, or 1.2%, to 52,688 at the start of trading in New York.
The broader S&P 500 index rose 1.05%.
John Butcher senior US economist at Aberdeen believes that a jump in monthly core inflation will anchor a rise in US interest rates next week:
“A rate hike by the Federal Reserve next week now looks highly likely. Today’s CPI data showed that core prices accelerated again in August, rising 0.3% above consensus month-over-month. This removed the main obstacle to a fed funds rate hike next week, which was that price data was showing a disinflationary trend.
In recent weeks, we have seen a split in the FOMC, with some members calling for a rate hike now, while others suggested they would vote to pause the decision if risks to rising inflation did not materialize. Today’s inflation data suggests that these growth risks are emerging. And with oil prices above $100 a barrel and no end to conflict in the Middle East in the near term, inflation risks remain heavily tilted to the upside.
Stephen Coltmanhead of macro department 21 shares says the Federal Reserve will feel pressure to raise rates next week:
The Fed typically wouldn’t consider rate hikes given that the core consumer price index is just 2.4%, but with the trend in the Supercore index (excluding housing) getting hotter than expected and high oil prices adding to the headlines, the committee will likely feel pressure to hike rates next week to demonstrate its response.
I think the Fed would like to have more time to see how the recent rise in yields affects the economy, where consumers are already under pressure amid slowing wage growth and what appear to be tax hikes due to higher energy prices, but today’s numbers have likely forced them to act.
A US interest rate hike next week is now more likely
Investors believe the US Federal Reserve is likely to raise US interest rates next week following the August inflation report.
Market odds of a rate hike at next week’s Fed meeting rose to 82% after previously reaching 90%. Reuters reports this.. Before the report was released, the market estimated the probability of a rate hike on September 16 with a probability of 68%.
Anthony Willissenior economist Colombia Thread needlebelieves that the price increase next week is a “done deal”:
“Expectations for a US rate hike were already rising following last week’s strong jobs data. Historically, the Fed has pushed market expectations to at least a 70% chance before taking policy action, so policy “shocks” have been limited. However, in the new Kevin Warsh era, they seem comfortable playing their cards close to their chest.
“During this week, buoyed by rising commodity prices, expectations for a Fed hike have risen to 70%. Given the weight Warsh has placed on inflation data, and his disappointment with inflation consistently above target for more than five years, today’s CPI reading was seen as the final piece of the puzzle for a potential policy move next week. With the August release of the Fed CPI now appearing to be a done deal, markets are now pricing in a 93% chance that The Fed will raise rates next week.”