US: Inflation Accelerates, War on Iran Pushes up Energy Costs

By Staff, Agencies 

US consumer prices accelerated in August, while underlying inflation recorded its largest monthly increase in four months, strengthening expectations that the Federal Reserve will raise interest rates next week, Reuters reports. 

The Labor Department's Consumer Price Index report followed stronger-than-expected readings in several components of the Producer Price Index released Thursday, which feed into the Personal Consumption Expenditures price indexes tracked by the Federal Reserve.

Financial markets initially priced in a 91% probability of a quarter-point rate hike at the Federal Reserve's Tuesday-Wednesday meeting, before easing to 87%, according to CME's FedWatch tool. The probability had stood at 72% on Thursday.

The Fed's benchmark overnight interest rate currently stands at 3.50%-3.75%.

Most economists said the firmer inflation data, alongside signs of a recovering labor market in August, could push the Federal Reserve toward another rate increase in October or December.

The Consumer Price Index increased 0.4% in August, following a 0.1% rise in July, according to the Labor Department's Bureau of Labor Statistics.

Over the 12 months through August, consumer prices rose 3.4%, matching July's annual increase and meeting economists' expectations.

Gasoline prices jumped 3.9% after declining for two consecutive months, accounting for more than one-third of the monthly increase in the CPI.

Other motor fuels, including diesel, surged 9.6% in August and were up 44% year-on-year.

Core CPI, which excludes food and energy, increased 0.3% during the month, marking its largest rise since April and exceeding economists' expectations for a 0.2% increase for the second consecutive month.

Economists warned that the continuing US war on Iran could intensify inflationary pressure through the energy market.

Crude oil prices climbed above $100 a barrel this week, while the US national average diesel price exceeded $6 per gallon for the first time.

"Energy inflation does not stay at the gas station. It travels by ⁠truck, airplane and cargo ship into nearly every store in America," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University, to Reuters. "The Fed is now more likely than not to raise its policy rate ... it cannot afford to let an energy shock become an everything shock."