US inflation edges up (again): the nightmare is not over

Lorenzo Bagnato

14 September 2023 - 12:42

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US consumer prices increased in August for the second consecutive month, prompting questions on the Fed’s future strategy.

US inflation edges up (again): the nightmare is not over

Higher for longer” has been one of the American Federal Reserve’s slogans to explain its monetary policy. The August inflation reading in the United States seems to prove it, with consumer prices edging up for the second consecutive month.

August inflation rose 0.6% from July, or 3.7% year-on-year. Core inflation, on the other hand, cooled more than expected to 4.3%. Core inflation is the index of consumer prices without volatile products like food and energy. Normally, core inflation is the most important indicator for the Fed to choose monetary policies from.

Indeed, it was fuel prices that massively drew headline inflation up. Brent prices (the global oil benchmark) jumped to $92 per barrel, and the West Texas Intermediate (US oil benchmark) to $89.

For every-day people, fuel prices jumped 10% in August, although they remained lower than the same month last year.

Food resulted 4.3% more expensive in August than last year.

Within the core inflation range, housing retains the largest price increase at 0.5% and 0.4% month-on-month for rents and homeowning respectively. The shelter index edged up 0.3% month-on-month. The rise in prices coincided with fewer purchases of new homes in the United States.

The Fed’s decision

The Federal Reserve will use the data at hand to decide the future monetary policy at their September 19-20 meeting. Markets are still optimistic, pricing in at 95% a stabilization of interest rates at the current level.

Since March 2022, the Federal Reserve hiked interest rates almost constantly, with the latest hike taking place in July. The only exception was in June when the Fed needed to preserve the American banking system from collapse. At the moment, interest rates are at 5.5%.

US inflation almost reached double-digits in 2022, peaking at 9.2% in June of last year. Since then, headline inflation fell constantly (often more than expected) until this summer, when it started climbing again.

Fed Chairman Jerome Powell always stated that interest rates will remain high until inflation starts to cool down consistently. Not being the case now, the Fed might decide on another small hike.

Furthermore, the US economy keeps showing signs of resilience, with increased consumer spending in August and low unemployment. Although the creation of new jobs last month was worse than expected, it still reached the replacement level for new people entering the workforce.

However, as chief global strategist at Principal Asset Management Seema Shah said: "The inflation print likely is not enough to tilt next week’s Fed call towards a hike, yet it also hasn’t entirely cleared up the question of a November pause vs. hike."


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