Petrol Drove a Third of August's Inflation, Core Ran Hot, and the Market Now Treats Wednesday's Rate Rise as Done

The number the Federal Reserve had said it was waiting for arrived on Friday morning, and it did not give the doves anything to work with. The Bureau of Labor Statistics put the consumer price index up 0.4 per cent in August, seasonally adjusted, and 3.4 per cent over twelve months. Strip out food and energy and the core index rose 0.3 per cent on the month, a tenth more than forecasters had pencilled in, and 2.4 per cent on the year. By Friday's close, interest rate futures were pricing a quarter-point rise at next week's meeting at close to ninety per cent. On Thursday it had been seventy-two.

Where the increase came from

Energy did most of the work. The energy index rose 2.1 per cent in August after falling 1.5 per cent in July, and it is 16.3 per cent higher than a year ago. Petrol alone rose 3.9 per cent on the month and 27.4 per cent on the year, and the bureau says it accounted for more than a third of the whole monthly increase. Airline fares, which follow jet fuel with a lag, rose 2.7 per cent in August and are up 23.4 per cent over twelve months. NBC reports that diesel reached six dollars a gallon for the first time. Set against that, shelter rose 0.3 per cent and 3.0 per cent on the year, food rose 0.1 per cent with grocery prices flat, motor insurance fell 0.8 per cent and medical care fell 0.2 per cent. Real average hourly earnings fell 0.1 per cent on the month and are down 0.3 per cent on the year, which is the figure households will feel.

The war is the reason for all of it. Brent has been above a hundred dollars since the tanker strikes and the missiles at Al-Azraq on Wednesday, and even Friday's fall of nearly three per cent left it a little above 104 dollars. The October US crude contract settled at 100.05 dollars. An energy shock of this kind is exactly the sort of inflation a central bank is taught to look through, because raising rates does not produce oil. The trouble is the core reading. Goldman Sachs's Alexandra Wilson-Elizondo called the decision a jump ball before the release; Capital Economics' Stephen Brown said afterwards that the upside surprise to core "means the Fed looks set to hike next week". Citigroup's economists had put it plainly at the start of the week: "The fate of the September meeting lies with August CPI."

What the Fed is weighing

The funds rate has sat at 3.5 to 3.75 per cent all year, and the last time the committee raised it was July 2023. Chair Kevin Warsh has said he is watching how broad-based the inflation problem is, which is the language of someone who does not want to be seen tightening into a war-driven oil spike, and who will do it anyway if the core numbers give him cover. Friday's did. The Treasury market had already moved: the ten-year yield closed Thursday at 4.95 per cent and the two-year at 4.56 per cent, both from the Fed's own FRED series, and the thirty-year has been above five per cent since the start of the month. Futures put the chance of a second rise in October at close to sixty per cent.