The Japan Times - US inflation steady in August, fueling Fed rate hike expectations

The new data showed consumer price index (CPI) inflation was steady in August but it remains significantly elevated from earlier in the year -- and well above the Fed's long-term two-percent target.

US households have been battered by years of high prices since the pandemic -- when consumer inflation hit 9.1 percent -- and Americans' ability to afford basics like food and fuel will be a key issue in November's midterm elections.

Several Fed policymakers have indicated that they would be prepared to raise interest rates if August inflation data did not show a slowdown in price increases. The central bank's rate-setting committee meets next week.

Any move to raise rates will be sure to anger US President Donald Trump, who has launched an unprecedented campaign against the Fed's independence, demanding that policymakers lower interest rates to spur economic activity.

Trump is facing pressure from voters over the high cost of living, with Democrats seeking to wrest control of both houses of Congress from his Republican Party. If they do so, it could significantly complicate his ability to push through policies as he has since taking office.

The US president launched a criminal probe against previous Fed chair Jerome Powell, is attempting to fire another Fed governor and last week even made a surprise threat to cut trade ties with certain countries if the Fed raised rates.

- Fuel prices surge -

Friday's data showed that fuel price increases formed a significant chunk of August's inflation, accounting for one-third of the monthly increase in consumer prices.

The price of gasoline is up 44 percent since the start of the Iran war in February, according to AAA motor club data.

The index for inflation excluding volatile fuel and food prices -- so-called "core" inflation -- rose 2.4 percent in August year-on-year.

Speaking to AFP before Friday's data was released, Navy Federal Credit Union chief economist Heather Long said a steady inflation figure would ensure the Fed raises rates.

"If the data comes in in line with expectations, or certainly any higher than expectations, a hike is a definite," she said.

EY Parthenon chief economist Gregory Daco expected policymakers to focus on "core" inflation as they make their rate decisions.

Others like KPMG chief economist Diane Swonk anticipated the Fed is likely to raise short-term interest rates before year-end despite "despite intensifying political pressure to cut."

- Inflating hitting hard -

High prices have been hitting the US economy hard, with wholesale inflation picking up more than expected in August, according to government data on Thursday.

The Fed last raised rates three years ago, capping a hiking cycle it began in the pandemic to combat surging prices.

Inflation has declined steadily from its 2022 peak, but never hit the two-percent target. In February it fell to 2.4 percent but subsequently surged to three-year highs on the back of Trump's war on Iran.

The United States and Israel launched strikes on Iran and killed its leadership at the start of the war, plunging the Middle East into chaos as Tehran targeted US regional allies and choked off a key energy trade route.

High energy prices have hit households around the world. Record diesel prices -- which hit an unprecedented $6 per gallon in the United States on Friday -- have also driven up transportation, farming and construction costs.

The Fed has gradually lowered rates since 2024 but has held them steady between 3.50 percent and 3.75 percent this year as inflation climbed following the Middle East war and as the effects of Trump's tariff war filtered through the economy.

With Trump's approval rating languishing, the president on Wednesday promised a $5,000 "dividend" to every American adult if Republicans retained both chambers of Congress in November's elections.

"That's (officials) trying to address the affordability crisis that many Americans feel right now," Long said.

T.Sasaki--JT