Rising gasoline prices push up U.S. inflation rate to 3.7%

U.S. consumer prices increased by the most in more than a year in August amid a surge in the cost of gasoline, but a moderate rise in underlying inflation could encourage the Federal Reserve to keep interest rates on hold next Wednesday.

The consumer price index increased by 0.6 per cent last month, the largest gain since June 2022, the Labour Department said on Wednesday. The CPI had risen 0.2 per cent for two straight months.

Gasoline prices accelerated in August, peaking at $3.984 US per gallon in the third week of the month, according to data from the U.S. Energy Information Administration. That compared to $3.676 US per gallon during the same period in July.

In the 12-months through August, the inflation rate jumped 3.7 per cent after climbing 3.2 per cent in July. While that marked the second straight month of a pick up in annual inflation, year-on-year consumer prices have come down from a peak of 9.1 per cent in June 2022. The Fed has a 2 per cent inflation target.

Economists polled by Reuters had forecast the CPI increasing 0.6 per cent last month and advancing 3.6 per cent year-on-year. The report was published a week before the Fed's rate decision and followed data this month showing an easing in labor market conditions in August.

Excluding the volatile food and energy components, the CPI increased 0.3 per cent amid declining prices for used cars and trucks. The so-called core CPI had increased 0.2 per cent for two consecutive months. Though rents continued to increase, the trend is cooling and a further slowdown is expected as more apartment buildings come on the market.

In the 12 months through August, the so-called core CPI increased 4.3 per cent. That was the smallest year-on-year rise since September 2021 and followed a 4.7 per cent gain in July.

Financial markets overwhelmingly expect the Fed to leave its policy rate unchanged next Wednesday, according to CME Group's FedWatch tool. Since March 2022, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25 per cent - 5.50 per cent range.

But a rate hike in November remains on the table as services inflation, excluding shelter, remains elevated.

Some economists believe inflation risks are tilted to the upside, citing rising insurance costs, especially for motor vehicles. Health insurance costs in the CPI report are expected to rise from October through next spring after the Labor Department's Bureau of Labor Statistics, which compiles the report, recently announced changes to its methodology for measuring these costs.

A strike in the automobile sector could disrupt supply chains and boost motor vehicle prices if it lasted more than a month, economists said.

United Auto Workers members last month voted overwhelmingly in favor of authorizing a work stoppage at General Motors , Ford Motor and Stellantis, if an agreement over wages and pension plans was not reached before the current four-year contract expires on Sept. 14.