The U.S. consumer prices have suddenly dropped in August as the prices of gasoline returned to their decline. Ideally, this means that inflation rates should be tamed because it complicates the Federal Reserve’s decision on whether to hike interest rates.
On Wednesday, the Labor Department stated that its Consumer Price Index dropped by 0.1%, which was the first drop since January, after climbing up 0.1% in July. CPI increased by 0.2% in the 12 months through August.
There were implications of a disinflationary trend that reaffirmed itself in plain contrast with a moderately strong economy and a quickly tightening labor market. This also emphasizes the dilemma Fed officials encounter as they anticipate raising interest rates for the first time in almost a decade.
The policy of the U.S. central bank committee supposed to start a two-day meeting later on Wednesday. There is solid data on consumer spending, housing and employment that supports a rate hike, however, the likelihood for higher borrowing costs has been destabilized by recent global financial markets disorder.
U.S. financial markets priced a 29% probability of an increase in the Fed’s benchmark overnight interest rate on Thursday. There hasn’t been much change after the release of this data.
Wall Street stocks were trading higher after the CPI data. Treasuries have increased, while the dollar fell against several currencies.
Labor market conditions have tightened, which marks a record high of job openings and a 5.1% unemployment rate.
Slow wage gains and a strong dollar contributed to keeping inflation below the Fed’s 2% target. Economists forecasted the CPI to be unchanged in August rising 0.2% from a year ago.
The core CPI went up 0.1% last month after a rise in July. The silenced gains in the core CPI reflect the impact of the dollar on the cost of imported goods.
The dollar has gained 17.1% against U.S. currencies of main trading partners since June 2014.
During the 12 months through August, core CPI increased by 1.8%, which was the fifth time in six months that the change was 1.8 percent.
Over the last month, gasoline prices dropped 4.1%, which was the biggest drop since January, after rising 0.9% in July. Gasoline prices had increased for three months straight. Food prices rose 0.2% and the cost of eggs increased by 7.7%.
Egg prices are up by almost 35% from a year ago. There were also increases in prices for tobacco and apparel. However, airline fares dropped by about 3% and used car prices declined for the fourth month straight.
In the last month, the rental index increased by 0.3%, which matched July’s gain. Demand for rental accommodation is pushed up by rising household formation as the steady labor market reassures young adults to leave their parental homes.