Housing and health costs lift US inflation ahead of Fed meeting
US consumer prices rose more than expected in August as healthcare costs recorded their biggest gain in more than 32 years, pointing to a steady build-up of inflation that could allow the Federal Reserve to raise interest rates this year.
The cost of living last month was also pushed up by sustained increases in rents. The uptick in inflation is likely to be welcomed by Fed officials when they gather next week to deliberate on monetary policy, although a rate hike is not expected at that meeting.
"The economy may not be firing on all cylinders, but growth is enough to spark a little more inflation than we thought. The Fed decision is going down to the wire," said Chris Rupkey," chief economist at MUFG Union Bank in New York.
The US Labor Department said on Friday its Consumer Price Index increased 0.2pc last month after being unchanged in July.
In the 12 months through August, the CPI increased 1.1pc after advancing 0.8pc in the year through July.
The so-called core CPI, which strips out food and energy costs, rose 0.3pc last month, the biggest increase since February, after gaining 0.1pc in July.
Economists had forecast the CPI nudging up 0.1pc last month and the core CPI gaining 0.2pc. The core CPI increased 2.3pc in the 12 months through August after rising 2.2pc in the year through July.
The dollar rallied against a basket of currencies on the data, while prices for US Treasuries were mixed. US stocks were trading lower, with sentiment also hurt by declining oil prices and the US Justice Department's demand for $14bn (€12.5bn) from Deutsche Bank to settle claims related to sales of mortgage-backed securities.
The Fed is expected to leave interest rates unchanged next week against the backdrop of a raft of disappointing economic reports for August, including weak retail sales and industrial production as well as a slowdown in job growth.
A separate report on Friday, however, showed consumer sentiment was steady in early September, suggesting retail sales could rebound in the coming months.
The US central bank has a 2pc inflation target and tracks an inflation measure that has been stuck at 1.6pc since March. Fed Governor Lael Brainard said yesterday she wanted to see stronger consumer spending data and signs of rising inflation before hiking rates.
The Fed raised its benchmark overnight interest rate at the end of last year for the first time in nearly a decade, but has held it steady this year amid concerns over persistently low inflation. Many economists expect the Fed to increase borrowing costs at its December policy meeting.
Medical care costs jumped 1pc last month, the largest increase since February 1984, after advancing 0.5pc in July. The cost of hospital services jumped 1.7pc, the biggest gain since October 2015. Prices for prescription medicine soared 1.3pc.
Economists linked the surges to the expansion of healthcare coverage under President Barack Obama's signature 2010 healthcare restructuring law.
"This, of course, is the dark cloud surrounding the good-news story about record numbers of people signing up for health insurance," said Jay Morelock, an economist at FTN Financial in New York.
"The bulk of the increase was among the population with pre-existing conditions, which has significantly boosted costs for all." (Reuters)