Inflation seemed to want to subside in the United States, but the consumer price index instead posted a 0.1% increase in August. In annual variation, the rise in prices slowed, from 8.5% in July to 8.3% in August, which is however insufficient to calm market concerns.
Posted at 5:00 a.m.
Why did the consumer price index increase in August?
After remaining unchanged in July, the consumer price index edged up 0.1% in August, the US Bureau of Labor Statistics reported on Tuesday. Housing, food and medical costs were responsible for the monthly increase, which was partially offset by a drop in the price of oil.
On an annual basis, the increase in the inflation rate is slowing down, from 8.5% in July to 8.3% in August. As in Canada, this deceleration is essentially due to the fall in the price of oil. The price of gas, which exceeded US$5 a gallon in June, is currently back at around US$3.70.
What is core inflation?
Inflation hit a 41-year high in June, at 9.1%. The figures for August are less alarming, but core inflation continues to rise south of the border, which is considered worrying. Core inflation is the change in the price level without the more volatile items like food and energy. This is an indicator closely followed by the monetary authorities to know if inflation is rooted in the economy. In August, core inflation increased by 0.6%, after the more modest increase of 0.3% recorded in July.
Year over year, core inflation accelerated from 5.9% in July to 6.3% last month. Core inflation is at its highest level since peaking last March. This means that with the exception of food and energy, almost all goods and services cost more. This is the case for new cars, the price of which rose by 0.8% in August, while the price of used cars fell slightly by 0.1%.
“Inflationary pressures within the US economy remain very present,” summarizes Francis Généreux, senior economist at Desjardins. Despite falling energy costs, “domestic cost-raising factors are still showing up and delaying the easing of inflation,” he adds.
Why are stock markets worried?
Instead, observers were expecting a slight decline in the price level and a slowdown in the pace of interest rate increases. The reverse has happened, observes Derek Holt, an economist at Scotiabank. “It’s very unlikely that the Federal Reserve will signal a pause” in rate hikes, as the markets had hoped, he said.
Stock markets took a dim view of the news, which indicates that the road back to a controlled inflation rate is likely to be longer and more arduous for the US central bank.
The technology sector was the hardest hit, with the NASDAQ falling more than 5%. The S&P 500 index had its worst day since June 2020 on Tuesday, falling 4.3%. The Dow Jones plunged 4%, while the Canadian stock market followed suit, dropping nearly two percentage points.
The increased risk of recession that comes with the fight against inflation has also influenced the price of oil. WTI lost 1% a barrel before recovering late in the day to close at US$87.57, down slightly from the previous day. The Canadian dollar ended the day at US$0.7628.
How will the Federal Reserve react?
While an easing was expected, worsening inflation means more interest rate hikes are on the way. The next could even be a percentage point, advanced some observers Tuesday.
Like the Bank of Canada, the US Federal Reserve is determined to do everything in its power to rein in inflation. Just last week, its chairman, Jerome Powell, said that time is running out to prevent inflation from spiraling out of control, as it did in the 1970s and 1980s. the job is done,” the Fed boss said publicly.
For most observers, these remarks mean that the next increase in the key rate will be significant, possibly up to a percentage point. This is the case with CIBC economists, who had expected a 75 basis point increase, but now believe that a 100 basis point hike should not be ruled out, given the strength of the inflation, commented economist Katherine Judge.
The Federal Reserve has already raised its key rate four times this year, the last two of which by 75 basis points. The policy rate is currently between 2.25% and 2.50%.
The Federal Reserve’s next interest rate decision is expected next week. At home, Statistics Canada will release the inflation figures for August next Tuesday.