Inflation Rises as Gas Prices Spike
inflation rose by 0.1% in August, as shown by the CPI report. However, this was largely due to higher gasoline prices; other prices rose more than the Fed wanted to see.
![Jerome Powell, chairman of the U.S. Federal Reserve, is unlikely to be comforted by the August CPI ... [+] report which showed underlying inflation remains in many areas of the U.S. economy. Photographer: Ting Shen/Bloomberg © 2022 Bloomberg Finance LP](/uploaded_images/cc362ea2d5f230bc79eec737e518abb9_1663078985.jpg)
The report indicates that inflation is not picking up as much as expected, which is a concern for the Federal Reserve. Policymakers will be closely watching to see if this trend continues in the coming months.
The Fed is unlikely to be too concerned about the latest inflation report, which showed a sharp drop in gasoline prices driving down overall inflation. The central bank is more focused on underlying inflationary trends, and temporary fluctuations in energy prices are not likely to have a big impact on policy decisions. Markets are now pricing in a higher chance of a 100bps interest rate hike later this month, though 75bps remains the most likely outcome.
Signs of Concern: Worrisome behaviors that may indicate a problem
The Consumer Price Index (CPI) rose in August, driven by higher prices for energy and other goods and services. There is concern that when energy prices stabilize, underlying inflation will remain higher than the Fed's target level. This could lead to higher interest rates and slower economic growth.
The Fed's decision to raise interest rates could be based on today's inflation report, which showed material price increases for the month. The Fed wants to see a broad range of prices signal that the wave of inflation is past, and this report may not provide enough evidence to support that conclusion.
A Few Reasons For Optimism: Here's Why Things Might Not Be So Bad After All
It's good news that the month-on-month rate is low and falling gasoline costs are more welcome than rising prices. Even though food costs rose 0.8% for the month, that's still the lowest level of food price inflation we've seen in a while. It's also encouraging that air fares and used car prices continue to decline. However, the Fed wants to see signs that overall inflation is cooling in the U.S. and the CPI report didn't offer that on most assessments.
Rate Hikes: How They'll Affect You
While today's inflation report is unlikely to change the Fed's rate decision on September 21, it has made a 50bps rate increase less likely and a very large 100bps increase an outside possibility. So markets believe that the Fed is now slightly more nervous about where inflation is trending.
The latest inflation report is disappointing for markets, as it shows that inflation remains elevated despite recent falls in gasoline prices. This means that the Federal Reserve is unlikely to raise interest rates any time soon, as inflation needs to be lower before rates can increase. This is bad news for those hoping for a rate hike in the near future, as it looks like inflation is still trending upwards.
