Exorbitant Rent, Food Boost US Inflation in August

U.S. consumer prices unexpectedly rose in August and underlying inflation accelerated amid rising costs for rents and healthcare, giving the Federal Reserve ammunition to deliver a third 75 basis points interest rate hike next Wednesday.

The surprisingly firm inflation readings reported by the Labor Department on Tuesday were despite an easing in global supply chains, which had contributed to a surge in prices earlier in the year.

With a resilient labor market supporting strong wage growth, inflation has probably not peaked, keeping the Fed on an aggressive monetary policy path for a while. Food prices rose 0.8%, with the cost of food consumed at home increasing 0.7%. Food prices surged 11.4% over the last year, the largest 12-month increase since May 1979.

Economists polled by Reuters had forecast the CPI dipping 0.1%. In the 12 months through August, the CPI increased 8.3%. That was a deceleration from July's 8.5% rise and a 9.1% jump in June, which was the biggest gain since November 1981. Inflation has overshot the Fed's 2% target.

"The Fed is all but sure to hike rates aggressively next week, likely by 75 basis points, while pushing back strongly against talk of a near-term pause in the tightening cycle," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The consumer price index edged up 0.1% last month after being unchanged in July. Though consumers got some relief from a 10.6% decline in gasoline prices, they had to dig deeper to pay for food, rent, healthcare, electricity and natural gas.

Beyond the dilemma the August inflation numbers present to the U.S. central bank, they are a headache as well for the Biden administration and congressional Democrats hoping to limit their losses in the Nov. 8 mid-term elections, which are expected to flip the House of Representatives into Republican hands. The annual CPI has remained above 8% for six straight months.

President Joe Biden said Tuesday it would "take more time and resolve to bring inflation down," and cited the recently passed Inflation Reduction Act aimed at lowering the cost of healthcare, prescription drugs and energy as steps taken by the White House to ease the burden of higher prices on Americans.

Fed officials gather next Tuesday and Wednesday for their regular policy meeting. Financial markets have priced in a 75 basis points rate increase next Wednesday, with potential for a full percentage point, according to CME's FedWatch Tool.

Stocks on Wall Street fell dramatically, ending a four-day winning streak. The dollar rallied against a basket of currencies. U.S. Treasury prices rose.