Daily Management Review

Sticky High Rents And Food Prices In The US Hikes August Inflation


Sticky High Rents And Food Prices In The US Hikes August Inflation
Consumer prices in the United States unexpectedly rose in August, and underlying inflation accelerated due to rising rent and healthcare costs, providing the Federal Reserve with ammunition to deliver a third 75 basis point interest rate hike next Wednesday.
The Labor Department reported surprisingly strong inflation readings on Tuesday, despite an ease in global supply chains, which had contributed to a price surge earlier in the year. With a strong labor market supporting strong wage growth, inflation is unlikely to have peaked, keeping the Fed on an aggressive monetary policy path for the foreseeable future.
"The Fed is all but sure to hike rates aggressively next week, likely by 75 basis points, while pushing back strongly against talk of a near-term pause in the tightening cycle," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.
The consumer price index increased 0.1per cent in August after remaining unchanged in July. Despite a 10.6per cent drop in gasoline prices, consumers had to dig deeper to pay for food, rent, healthcare, electricity, and natural gas.
Food prices increased by 0.8per cent, with the cost of food eaten at home increasing by 0.7per cent. Food prices increased 11.4per cent in a year, the highest 12-month increase since May 1979.
Reuters polled economists, who predicted a 0.1per cent drop in the CPI. The CPI increased 8.3per cent in the year to August. This was a slowdown from July's 8.5per cent increase and June's 9.1per cent increase, which was the largest since November 1981. Inflation has surpassed the Federal Reserve's 2per cent target.
Aside from the quandary that the August inflation figures present for the Federal Reserve, they are also a headache for the Biden administration and congressional Democrats hoping to limit their losses in the Nov. 8 midterm elections, which are expected to flip the House of Representatives to Republicans. For six months in a row, the annual CPI has remained above 8 per cent.
President Joe Biden said on Tuesday that it would "take more time and resolve to bring inflation down," citing the recently passed Inflation Reduction Act as steps taken by the White House to ease the burden of higher prices on Americans.
The Federal Reserve will hold its regular policy meeting next Tuesday and Wednesday. According to the CME's FedWatch Tool, financial markets have priced in a 75 basis point rate increase next Wednesday, with the possibility of a full percentage point increase.
Wall Street stocks fell, snapping a four-day winning streak. The dollar increased its value against a basket of currencies. U.S. Treasury prices increased.
"It's becoming more apparent to market participants that the amount of tightening from the Fed thus far has not been enough to cool the economy and bring down inflation," said Charlie Ripley, senior investment strategist at Allianz Investment Management in Minneapolis, Minnesota.
Last week, Fed Chair Jerome Powell reiterated the central bank's "strong commitment" to fighting inflation. In June and July, the Fed raised its policy rate by three-quarters of a percentage point each time. It has increased that rate from near zero to its current range of 2.25 per cent to 2.50 per cent since March.
Some price pressures are coming from the labor market, where the Fed is attempting to cool demand for workers.
Last week's data showed a three-month low in first-time applications for unemployment benefits. August saw solid job growth, with two job openings for every unemployed person on the last day of July.
This is supporting strong wage growth, contributing to higher service prices, and keeping underlying inflation high.
Excluding volatile food and energy components, the CPI rose 0.6 per cent in August after rising 0.3 per cent in July. Economists predicted a 0.3 per cent increase in the so-called core CPI.
Owners equivalent rent, a measure of how much homeowners would pay to rent or earn from renting their property, rose by 0.7 per cent. It increased by 6.3 per cent year on year, the largest increase since April 1986. Rents are sticky and account for a sizable portion of the CPI basket, implying that inflation will remain high for some time.
Higher mortgage rates and home prices are making it more difficult for many first-time buyers to purchase, increasing demand for rental housing. A rail workers strike, which could shut down the American rail system and impede the movement of goods as early as Friday, could fuel the inflationary fires.
"While private sector measures of rent growth suggest the corresponding CPI categories may be close to peaking on a monthly basis, the slow-moving nature of primary rent and OER in the CPI data suggest housing will continue to provide a sizable boost to core inflation in the coming months," said Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina.
Higher prices for household furnishings and operations, as well as motor vehicle insurance and education, all contributed to underlying inflation. Vehicle prices for new vehicles increased by 0.8 per cent. However, there were price reductions in airline tickets, communication, and used cars and trucks. Hotel and motel room rates remained unchanged.
Healthcare costs increased by 0.7 per cent, with hospital services increasing by 0.7 per cent and prescription medication increasing by 0.4 per cent. The core CPI rose 6.3 per cent in the year to August, after rising 5.9 per cent in July.
"Wages and shelter costs will remain the primary drivers of future inflation," said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles. "No significant respite in inflation is in sight."