August Inflation Uptick Unlikely to Alter Fed’s Course, Economists Say



Key Takeaways

  • August’s Consumer Price Index (CPI) showed a 0.6% increase over the previous month and a 3.7% rise over the past year, slightly surpassing economist forecasts.
  • Despite the uptick in inflation, economists believe it is unlikely to lead to a rate hike at the upcoming Federal Reserve meeting, with a 97% probability that the Fed will pause its rate hikes next week.

August Inflation Data and Market Response

Consumer prices experienced a slight uptick in August, driven primarily by a surge in oil prices, according to the Bureau of Labor Statistics. The CPI increased by 0.6% compared to the previous month and by 3.7% over the past year in August. This marked an acceleration from July’s 0.2% monthly increase and 3.2% annual price gain, slightly exceeding economist expectations of a 3.6% annual increase.


Despite the slightly elevated inflation reading, the financial markets exhibited a calm response. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite saw modest gains during morning trading.

Fed’s Response to Inflation and Its Implications

The Federal Reserve’s reaction to new economic data revealing increased prices holds significant implications for the market. Observers have recently adopted a more optimistic outlook regarding the Fed’s approach to inflation, which has moderated historically high inflation levels while averting a recession. However, the Fed faces the delicate task of balancing economic stability with inflation control. If further signals suggest that inflation is not slowing sufficiently, it could exert pressure on central bankers to implement more rigorous measures to curb economic expansion.


The surge in gas prices was a key contributor to the rise in consumer inflation. This highlights the influence of geopolitical factors on the US economy, factors beyond the Fed’s direct control. Recent announcements by Saudi Arabia and Russia regarding unilateral output cuts raised concerns about global supply, underscoring the importance of considering external factors in economic policy decisions.

Market Expectations and Fed’s Approach

Wall Street’s relatively subdued reaction to the latest inflation data suggests that the Fed is unlikely to adopt a more aggressive stance on taming inflation at the upcoming Federal Open Market Committee meeting. Instead, the central bank is expected to maintain its cautious approach leading up to its next meeting in November.


Economists anticipate that the slowing economy, a cooling labor market, and moderating wage growth will contribute to a gradual deceleration of inflation. Nancy Vanden Houten, the lead US economist at Oxford Economics, predicts that these factors will allow the Fed to keep its policy steady until it begins to gradually reduce rates in mid-2024.


While the recent uptick in inflation doesn’t rule out future rate hikes, experts suggest that the current level of inflation keeps the Fed’s actions in focus but doesn’t necessitate a significant departure from the narrative that the Fed is approaching the end of its rate hike cycle.


In conclusion, despite the August inflation uptick, the Federal Reserve is expected to maintain its cautious approach in the near term, with market participants closely monitoring future developments, especially the trajectory of oil prices.