The Bureau of Labor Statistics reported Friday that the consumer price index rose 0.4% in August from the prior month, placing the 12-month rate at 3.4%, unchanged from July. The more closely watched core reading, which excludes food and energy, climbed 0.3% for the month, a tenth of a percentage point above economists' consensus forecast. The core annual rate held at 2.4%, well above the Fed's 2% target.
Gasoline was the primary catalyst behind the monthly gain, with the index for gasoline rising 3.9 percent in August and accounting for over one third of the monthly all items increase. Shelter costs added 0.3%, transportation services rose 0.5%, and used vehicles gained 0.4%. Real average hourly earnings fell 0.1% from July to August and were down 0.3% year-over-year, meaning households absorbed further price increases without corresponding income gains. Sam Williamson, senior economist at First American, said the firmer core reading puts another thumb on the scale toward a Federal Reserve rate hike next week.
The August CPI print is the last major inflation reading the Federal Reserve will see before its September 15–16 FOMC vote. Economists at Citigroup had already flagged the stakes, writing that the fate of the September meeting lies with August CPI. The CME Group's FedWatch tool placed the probability of a rate hike at 84.7% as of Friday morning, up from approximately 70% on Thursday. Stephen Brown, chief North America economist at Capital Economics, said the upside surprise to core CPI in August means the Fed looks set to hike next week.
What remains unknown is how markets and mortgage rates would respond to an actual hike. Melissa Cohn, regional vice president at William Raveis Mortgage, has argued that a rate increase may not be bad news for borrowers, saying the bond market could react favorably and mortgage rates could go down. The dossier does not include the final FOMC decision or subsequent market moves, leaving the actual policy outcome and its near-term borrowing cost effects unresolved.