Numbers: The drop in gasoline prices last month brought down the second consecutive US inflation reading as the CPI rose by just 0.1% in August. But the report also shows that inflation has spread more widely across the economy and is set to prompt the Federal Reserve to raise interest rates sharply again.
Economists polled by the Wall Street Journal Expect a 0.1% drop in the CPI.
Meanwhile, a slight increase in the headline CPI last month brought the annual inflation rate down to 8.3% from 8.5% in July and 9.1% in June. The June reading was the highest since 1981.
In an even more worrying sign, the so-called core inflation rate that omits food and energy prices rose by a sharp 0.6%. Wall Street had expected a 0.3% gain.
The Fed views the core rate as a more accurate measure of future inflation trends.
The increase in the core rate over the past year has escalated to 6.3% from 5.9%, underscoring the amount of inflation that has become an integral part of the economy. The cost of basic goods such as food, rent, medical care, furnishings and new cars rose last month.
By contrast, inflation rose at an average rate of less than 2% per year in the decade leading up to the pandemic.
The Big Picture: The Fed is expected to raise interest rates until the end of 2022 in an effort to extinguish the worst inflationary fire in four decades, but it still has a long way to go back to pre-pandemic levels.
However, the central bank risks a recession in the US if it goes too far. Higher interest rates reduce inflation by increasing the cost of borrowing for consumers and businesses and thus slowing the economy.
The central bank is preparing for another massive interest rate hike at its next meeting on September 20-21 in Washington. The disappointing CPI report indicates that another three-quarter percentage point increase is in the works.
Key details: The lukewarm CPI readings in August and July led to mostly lower gasoline prices. The government said gasoline prices fell 10.6 percent last month. The average cost of a gallon of gas in the US, which topped $5 for the first time ever in June, fell to $3.83 at the end of August.
The Energy Information Administration said it has since fallen to $3.69 in September, indicating another low reading for headline inflation in the next CPI report.
But the remainder of the August report was filled with warning signs about inflation.
The cost of groceries jumped again last month and rose 11.1% in the past year — the largest increase since 1979.
Rents rose 0.7% in August, as did the housing sector. The Fed is particularly concerned about rising rents because it is one of the biggest contributors to inflation and shows little sign of a reversal.
Rents rose 6.3% last year, the largest increase since 1990.
More bad news: Medicare is getting more expensive again after prices stabilize during the pandemic. The cost of care jumped 5.4% last year, the largest increase since 1993.
Prices have also gone up last month for just about everything else, except airline prices and used cars.
The only piece of commodity news: Inflation-adjusted wages rose 0.2% in August to mark the second straight increase. However, real wages have fallen by 2.8% in the past year.
I look ahead: “The underlying inflation pressures remained strong in the August CPI report, effectively ensuring another rate hike from the Fed next week,” said chief economist Sal Gutierre of BMO Capital Markets.
market reaction: US stocks opened sharply lower on Tuesday as investors reacted stronger than expected to the August inflation reading. Dow Jones Industrial Average DJIA,
It fell more than 500 points, or 1.7%, shortly after the opening bell, while the S&P 500 SPX,
Nasdaq Heavy Composite Technology Inc. fell 2.2%,
It is down 2.9%, according to FactSet data.