Gasoline fuels US consumer inflation as underlying trend still improving

US consumer prices increased by the most in 14 months in August as gasoline prices surged, but the annual rise in underlying inflation was the smallest in nearly two years, potentially allowing the Federal Reserve to keep interest rates unchanged next week.

The mixed report from the Labour Department on Wednesday was published a week before the Federal Reserve’s interest rate decision and followed data this month showing an easing in labor market conditions in August. While the data bode well for no change in rates next Wednesday, the stickiness in services inflation keeps a hike on the table in November.

“The Fed is likely to keep the federal funds rate unchanged at this month’s meeting, but today’s report keeps alive the potential for another interest rate hike in coming months,” said Phillip Neuhart, director of market and economic research at First Citizens Bank in New York.

The consumer price index increased by 0.6% last month, the largest gain since June 2022. The CPI had risen 0.2% for two straight months. August’s increase in the CPI was in line with economists’ expectations.

Gasoline prices, which jumped 10.6% after rising 0.2% in July, accounted for more than half of the increase in the CPI last month. Gasoline prices accelerated in August, peaking at $3.984 per gallon in the third week of the month, according to data from the U.S. Energy Information Administration. That compared to $3.676 per gallon during the same period in July.

The cost of shelter continued to rise, though rents are moderating. Food prices gained 0.2% for the second straight month. Grocery food prices rose 0.2%, slowing from June’s 0.3% advance. Consumers paid more for meat, fish and eggs, but dairy products, fruit and vegetables were cheaper.

In the 12-months through August, the CPI accelerated 3.7% after climbing 3.2% in July. While that marked the second straight month of a pick-up in annual inflation, year-on-year consumer prices have come down from a peak of 9.1% in June 2022. The Fed has a 2% inflation target.

U.S. stocks opened lower. The dollar was little changed against a basket of currencies. U.S. Treasury prices were mixed.

“As long as the economy remains resilient and inflation doesn’t re-ignite, the market can rally into year-end, once we get past the seasonally weak months of September and October,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.

Excluding the volatile food and energy components, the CPI increased 0.3% as a 1.2% drop in prices of used cars and trucks was offset by higher costs for shelter, motor vehicle insurance as well as household furnishings and operations. The so-called core CPI had increased 0.2% for two consecutive months.

Core goods prices dipped 0.1% after decreasing 0.3% in July. Core services rose 0.4% for the second month in a row.

The cost of shelter rose 0.3%. Owners’ equivalent rent (OER), a measure of the amount homeowners would pay to rent or would earn from renting their property, climbed 0.4% after rising 0.5% in July. A further slowdown in rents is expected as more apartment buildings come on the market.

In the 12 months through August, the core CPI increased 4.3%. That was the smallest year-on-year rise since September 2021 and followed a 4.7% gain in July.

Financial markets overwhelmingly expect the Fed to leave its policy rate unchanged next Wednesday, according to CME Group’s FedWatch tool. Since March 2022, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range.

But a rate hike in November cannot be ruled out as services inflation, excluding shelter, remains elevated. Services less rents jumped 0.5% last month after gaining 0.2% in July.

Some economists believe inflation risks are tilted to the upside, citing rising insurance costs, especially for motor vehicles. Health insurance costs in the CPI report are expected to rise from October through next spring after the Labor Department’s Bureau of Labor Statistics, which compiles the report, recently announced changes to its methodology for measuring these costs.

A strike in the automobile sector could disrupt supply chains and boost motor vehicle prices if it lasted more than a month, economists said.

United Auto Workers members last month voted overwhelmingly in favor of authorizing a work stoppage at General Motors , Ford Motor and Stellantis, if an agreement over wages and pension plans was not reached before the current four-year contract expires on Sept. 14.