Inflation increased over expected in August, even with a strong decrease in gas prices

September 14, 2022: -Inflation increased over expected in August even as gas prices helped give consumers a little break, the Bureau of Labor Statistics reported on Tuesday.

Following a broad swath of goods and services, the consumer price index surged 0.1% for the month and 8.3% over the past year. Excluding volatile food and fuel costs, CPI jumped 0.6% in July and 6.3% from the same month in 2021.

According to Dow Jones estimates, economists had expected headline inflation to decline 0.1% and body to increase 0.3%. The respective year-over-year forecasts were for 8% and 6% gains.

Energy prices fell 5% for the month, led by a 10.6% slide in the gasoline index. However, those refuses were offset by gains elsewhere.

The food index increased 0.8% in August, and shelter costs, which make up about one-third of the weighting in the CPI, leaped 0.7% and are up 6.2% from a year ago.

Medical care services showed a significant increase, rising 0.8% on the month and up 5.6% from August 2021. New vehicle prices also rose, increasing 0.8% though used vehicles decreased by 0.1%.

Markets slumped following the news, with futures tied to the Dow Jones Industrial Average down about 350 points after being higher earlier.

Treasury yields leaped higher as the two-year note, closely connected to Federal Reserve interest rate moves, surged 0.13 percentage points to 3.704%.

Markets had widely anticipated the Fed to act a 0.75 percentage point rate increase at its meeting in the coming week. Following the CPI release, traders took the possibility of a half-point move entirely off the table. According to CME Group data, they even were pricing in a 10% chance of an entire percentage point hike. The report presented the sides of conflicts in the inflation picture.

After peaking at over $5 a gallon this summer, gasoline prices have dropped sharply. However, the cost of living in other vital areas, such as food and shelter, continues to push higher, raising concerns that inflation that had been concentrated is now beginning to spread.

To combat the increase, the Federal Reserve has raised interest rates four times this year for a total of 2.25 percentage points. Tuesday’s report was not expected to impact the September meeting significantly but through the year-end and into 2023 as the central bank looks to domestic inflation without tanking the economy.