Rising consumer costs push up US inflation

A jump in the cost of housing and higher petrol prices helped drive up headline inflation last month, assuaging some of the fears about the steady stream of soggy readings that has clouded the US economy this year.

Overall inflation measured by the consumer price index rose 0.4 per cent from the prior month and 1.9 per cent compared with a year earlier - up from 1.7 per cent previously, according to the Bureau of Labor Statistics.

A gauge that strips out food and energy costs rose 0.2 per cent, in line with Wall Street estimates, and advanced 1.7 per cent compared with the same month last year. The Federal Reserve has been tussling with a succession of poor inflation readings since the spring, casting doubt over its strategy for normalising interest rates.

While the US economy has by many measures returned to full employment, and growth reasserted itself in the second quarter following a dreary start to 2017, inflation has been resolutely weak.

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This has prompted questions about Federal Reserve models that suggest the diminishing slack in the jobs market should feed through to higher wages and prices.

The regular monthly inflation readings are set to be of acute interest to policymakers as they examine the case for a further rate rise in December.

Markets priced in a higher chance of a December rate rise in the wake of the data: the odds of a December rate rise stood at 50.9 per cent - up from 41.3 per cent, according to CME data.

The yield on the benchmark 10-year Treasury rose 2 basis points to 2.2076 per cent. US equities opened slightly lower and the dollar fell 0.1 per cent against a basket of other currencies.

Jim O’Sullivan of High Frequency Economics said: “The data help the case for following up the start of Fed balance sheet normalisation next week with another rate hike in December, although there will be three more CPI reports before the December decision is made.”

Rises in petrol and shelter indices accounted for nearly all of the advance in the all-items CPI index in August, which recorded its firmest month-on-month rise since January.

Energy prices rose 2.8 per cent, the most since the start of the year. The shelter index jumped 0.5 per cent on the month, the biggest increase since October 2005, accounting for the bulk of the rise in the index that excludes food and energy.

Price growth may be further lifted in the months ahead following twin hurricanes that hit Texas and Florida, boosting petrol prices and potentially impacting the prices of other products including used cars.

Thursday’s report may already reflect some impact from Hurricane Harvey, which occurred late in August.

The Fed will probably look through those effects as it attempts to untangle the longer-term forces driving inflation. The US central bank is due to meet next Tuesday and Wednesday, when it is likely to announce the kick-off to the process of reducing its balance sheet while leaving its key interest rate unchanged.

The CPI reading is an important indicator of inflation but the Fed focuses on an alternative index based on personal consumption expenditures.

Policymakers including Janet Yellen, the Fed chair, have stressed the role of one-off factors including a drop in wireless data charges and pharmaceutical costs in explaining the recent weakness of inflation gauges.

That has still left Fed policymakers divided over how much weight to put on the soft numbers. The central bank is close to achieving full employment, with the jobless rate at just 4.4 per cent, but its price stability goal has proven more elusive. Core inflation measured by the personal consumption expenditures price index has failed to hit the Fed’s 2 per cent target for five years.

Copyright The Financial Times Limited 2017