August Inflation Shock: Core Prices Rise, Knocking Back Peak CPI Bets; Stocks Slump

Core inflation pressures resurfaced last month, BLS data indicated Tuesday, accelerating bets on a big Fed rate hike next week in Washington.

Updated at 9:01 am EST

U.S. inflation slowed again last month, data from the Bureau of Labor Statistics indicated Wednesday, but core consumer prices jumped higher, suggesting pressures have yet to peak in the world’s biggest economy.

The headline consumer price index for the month of August was estimated to have risen 8.3% from last year, down from the 8.5% pace recorded in July but faster than the Street consensus forecast of 8.1%.  

On a monthly basis, inflation was up 0.1%, the BLS said, compared to a flat July reading and a 1.3% increase in June and the Street forecast of a 0.3% deceleration. Rents, food and airfares were the biggest components of the headline increase.

Gas prices were a big component to the softer headline reading, as the national average cost for a gallon of gas fell to $3.844 by then end of August, pulling prices more than 25% lower from their early June record highs amid run of 11 consecutive weeks of decline. The moves meant the energy component fell 5% from last year. 

Food price inflation, however, surged 11.4% from last year, compounding on last month’s 10.9% leap, to the fastest annual pace in April of 1979.

So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.6% on the month, and 6.3% on the year, the report noted, with both the annual and monthly reading coming firmly north of Street forecasts.

On Wall Street, U.S. equity futures reacted sharply to the faster-than-expected readings, with contracts tied to the S&P 500 priced for a 90 point decline and those linked to the Dow Jones Industrial Average indicating a 540 point slump.

Benchmark 2-year Treasury note yields rose 14 basis points to 3.69% while 10-year notes were pegged at 3.422%. The U.S. dollar index, which tracks the greenback against a basket of its global peers and was deep in the throes of its longest losing steak in a year, jumped 0.6% to 108.941.

The CME Group’s FedWatch is pricing in a 90% chance of a 75 basis point Fed rate hike next week in Washington, up from 73%last week, which would take its target rate to between 3% and 3.25%.

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