U.S. Inflation Holds at 3.4% as Gasoline Surge Revives Fed Rate Hike Risk

TLDR:

• U.S. inflation held at 3.4% in August as gasoline prices surged 3.9% and drove one-third of CPI gains.
• Core CPI eased to 2.4% annually, its lowest since March 2021, despite a 0.3% monthly increase in August.
• September Fed hike odds rose to 82% from 68% after core CPI beat the 0.2% consensus with a 0.3% gain.
• Bitcoin held near $77,000 as two-year Treasury yields rose and broader crypto value stood near $2.63 trillion.

U.S. inflation held at 3.4% in August, but a sharp gasoline rebound pushed monthly consumer prices higher and strengthened expectations for another Federal Reserve increase. The Consumer Price Index rose 0.4% from July, accelerating from the previous month’s 0.1% gain. Annual inflation remained unchanged at 3.4%, matching economists’ expectations.

However, the report also showed further improvement beneath the headline number. Core CPI rose 0.3% monthly, while its annual rate eased to 2.4% from 2.5%. That marked the lowest core inflation reading since March 2021 and highlighted the widening gap between underlying prices and energy-driven inflation.

Gasoline Surge Keeps U.S. Inflation at 3.4%, Lifts Fed Hike Odds

Gasoline prices climbed 3.9% in August and contributed roughly one-third of the monthly CPI increase. That rebound followed a 2.9% gasoline decline during July. Energy prices were also 16.3% higher than a year earlier, while food prices increased 2.7% annually. Shelter costs, another major household expense, rose 0.3% during August.

The latest figures therefore produced a mixed picture for U.S. inflation. Core pressures continued easing annually, while energy became a stronger contributor to headline consumer costs. That shift followed several months of changing inflation conditions.

Source: U.S. Bureau of Labor Statistics

Headline inflation stood near 2.4% early this year before reaching approximately 4.2% in May. It then retreated to 3.4% in July and remained at that level during August. However, oil prices have since climbed above $100 per barrel amid Middle East supply concerns.

Higher energy costs have already appeared further along the production chain. August producer prices increased 0.4% monthly and 5.4% from a year earlier. Producer energy prices climbed 4.2%, while diesel prices surged 24.1%. Together, those readings reinforced the renewed focus on energy before the Fed’s September meeting.

Core CPI Hits 2021 Low as Markets Brace for Fed Decision

The CPI report arrived before the Federal Reserve’s September 15-16 policy meeting, placing inflation back at the center of the policy debate. Markets increased their expectations for a rate increase after monthly core CPI advanced 0.3%, exceeding the 0.2% consensus estimate.

Market-implied odds of a September increase climbed to about 82% following the report, compared with approximately 68% beforehand. The Fed currently holds rates at 3.50%-3.75%. The labor market also provided policymakers with another important data point.

The U.S. economy added 162,000 jobs in August, while unemployment remained at 4.1%. Financial markets initially absorbed the inflation report without a broad sell-off. S&P 500 futures gained about 1%, while Nasdaq futures advanced roughly 1.1%.

However, the two-year Treasury yield moved higher as traders increased expectations for tighter monetary policy. Meanwhile, Bitcoin remained near $77,000 after retreating amid inflation concerns and elevated yields.

The broader cryptocurrency market capitalization stood near $2.63 trillion. August therefore left policymakers facing two contrasting inflation signals. Core inflation reached its lowest annual level since 2021, while gasoline and producer energy prices accelerated.

With employment remaining resilient, the September Fed decision now becomes the next major scheduled catalyst for Treasury markets, equities and cryptocurrencies.

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