By Ann Saphir
Sept 11 (Reuters) – Hotter-than-expected inflation readings will give little comfort to the majority of U.S. central bankers who have been counting on price pressures easing on their own, and set the table for an interest-rate hike next week.
U.S. consumer price inflation excluding energy and food, a key measure of underlying inflation, rose 0.3% last month from the previous month, the Bureau of Labor Statistics reported, more than the 0.2% that economists had anticipated. From a year earlier, core CPI rose 2.4%, while overall consumer inflation measured 3.4%.
Coupled with a stronger-than-expected August producer price index released on Thursday and oil prices that have soared above $100 a barrel amid renewed hostilities in the Middle East, the latest data suggest inflation by the Fed’s targeted measure, above the target 2% for 5-1/2 years, is again moving in the wrong direction.
“The renewed march higher in oil, gasoline and diesel prices add to concerns that higher energy prices could spill over to other goods and services and inflation expectations,” Nationwide Chief Economist Kathy Bostjancic wrote. “As such we are now looking for the Fed to raise rates by 25 bps at next week’s policy meeting.”
The Fed has left its policy rate in the 3.50%-3.75% range all year. Last month Fed Chairman Kevin Warsh said the central bank may need to act if he can’t have confidence that underlying inflation is moving toward 2% “clearly and at sufficient speed.”
Economists Friday said the August data does not appear to meet that bar, and would likely also stoke concern among Warsh’s colleagues who had expressed expectations that cooling inflation in June and July was the start of a welcome trend.
“Today’s clean 0.3% core CPI print, combined with the sharp rise in energy prices and persistent tensions with Iran, all but locks in a Fed rate hike next week,” wrote Principal Asset Management chief global strategist Seema Shah. “After half a decade of above-target inflation, policymakers are likely to conclude that more than one hike will be needed to re-establish price stability.”
Traders of short-term interest-rate futures are now pricing about an 85% chance of a quarter-point increase at the Fed’s September 15-16 meeting, versus about 70% before the report, a fact that itself will likely add to arguments within the Fed to deliver a rate hike and avoid surprising the market. That’s true even though at least part of the rise in the August core CPI was driven by a single category, wireless services, which jumped 5.9%.
“To be sure, the core rate would have been far more modest without this extraordinary rise,” wrote Inflation Insights’ Omair Sharif. “That said, I am not sure the Fed can play that game right now with odds of a hike pushing to the 90%-ish zone.”
(Reporting by Ann Saphir, Michael S. Derby, Lucia Mutikani; Editing by Toby Chopra and Chizu Nomiyama)
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