United States: Inflation Holds Steady in August, but Gasoline Prices Will Continue to Affect the Cost of Living

Consumer price developments in August were in line with our forecast and close to consensus expectations. The downward trend that had taken hold after gasoline prices recently peaked in May has now come to an end. Headline inflation is below the 4.2% recorded in May, but at 3.4%, it remains one percentage point higher than in February, before the conflict with Iran began.

One-third of the 0.4% monthly increase in headline CPI was attributable to a 3.9% jump in gasoline prices. This followed two consecutive monthly declines. Fuel oil prices rose even more sharply in August. However, the impact on overall energy prices was mitigated by declines in electricity and natural gas prices. Gasoline prices are likely to continue playing a major role in the months ahead. Prices at the pump have already risen 5.3% in September, and current conditions offer little reason to expect a sudden reprieve. The national average price of diesel fuel even exceeded US$6 per gallon in recent days, an all-time high. Energy is therefore expected to make another positive contribution to both the monthly and annual changes in headline CPI in September and possibly October.

Partly offsetting higher energy prices, food prices remained more subdued. Grocery prices were unchanged in August after edging down in July.

Excluding food and energy, the 0.3% monthly increase in core CPI was the strongest since April. Goods prices posted a relatively modest gain of 0.1%, following a 0.2% increase in July. Declines in the prices of pharmaceuticals and cellphones more than offset increases in motor vehicle and household appliance prices. Meanwhile, prices for services excluding energy rose somewhat faster than in previous months. Price growth accelerated in accommodation and transportation services, notably airfares (+2.7% m/m). Core services excluding shelter increased 0.5% on the month, the strongest gain since January.

Inflation held steady in August, but risks remain tilted to the upside for now. Oil and gasoline prices have resumed a pronounced upward trend in recent weeks and days and will push inflation higher as early as September. Diesel prices may also affect transportation costs and prices outside the energy sector. Combined with the labour market’s stronger performance, these risks could tip the balance toward a policy rate increase at the Federal Reserve’s monetary policy meeting, which concludes next Wednesday. That said, Kevin Warsh’s less conventional style leaves open the possibility of a surprise. However, a rate increase as early as next week would reduce the likelihood that the Fed would need to adjust policy at its late-October meeting, just ahead of the midterm elections.