August inflation holds at 3.4% as gasoline, not rents, explains the acceleration

Gasoline prices rose 3.9% in August and accounted for more than a third of the monthly increase in the consumer-price index, the Bureau of Labor Statistics said Friday. That reversal, after a 2.9% drop in July, is why the headline accelerated from 0.1% to 0.4%. It is not why the core index, the one the Federal Reserve will carry into next week's meeting, printed at 0.3%.

The annual rate stayed at 3.4% for a second month. Core inflation, which excludes food and energy, rose 0.3% on the month after 0.2% in July, 0.1 percentage point above the Dow Jones estimate of 0.2%, even as the 12-month core rate eased to 2.4% from 2.5%. Fed-funds futures, which before the 8:30 a.m. Eastern release had priced roughly a 70% chance of a quarter-point increase at next week's meeting, moved toward 90% afterward.

Hike odds jumped. Long Treasuries did not sell off.

Kathy Bostjancic, chief economist at Nationwide, said Chair Kevin Warsh and others had signaled that rates can stay on hold only if disinflation continues, and that "today's August report did not deliver that." Chris Zaccarelli, chief investment officer at Northlight Asset Management, said that with the 0.3% core increase, "the Fed now finds itself with its back against the wall."

The 2-year yield moved first, then gave most of it back. At 8:32 a.m., it was at 4.594%, up 4.6 basis points. It later reached 4.65% before easing to 4.59%. By 11:45 a.m. Eastern, the 10-year yield was 4.94%, down 1 basis point on the session, and the 30-year was 5.33%, down about 4 basis points. The fund that holds Treasuries due in 20 years or more, BTLT, was up 0.55%. The 7- to 10-year Treasury fund, BIEF, was little changed. The 1- to 3-year fund, BSHY, was unchanged.

West Texas Intermediate crude was at $99.44 a barrel, down 3.0%. The S&P 500 was at 7,674, up 1.1%. The Nasdaq-100 was up 1.2%.

Gasoline accounts for the headline's jump

Energy rose 2.1% in August after falling 1.5% in July and is up 16.3% from a year earlier. Gasoline, up 3.9% on the month and 27.4% on the year, did essentially all of that damage: electricity fell 0.2% and utility gas fell 1.1%, so energy services as a group declined. Before seasonal adjustment, gasoline prices were up 2.5% in August. The seasonally adjusted jump is the one inside the 0.4% headline.

That 27.4% year-over-year rise is the CPI's measure of the oil shock that followed the war with Iran and the disruption of shipments through the Strait of Hormuz. Bostjancic called the disruption "not one and done." Friday's 3.0% drop in crude is a one-day move against that year. Prices at the pump have risen further in September, a different month's index. Food rose 0.1%, the same as in July. Together, food contributed about 4% of August's monthly rise in the all-items index; energy contributed about 38%; core contributed the remaining 58%.

Shelter reaccelerated. The rents inside it did not.

Core's published step-up from 0.2% to 0.3%, 0.29% on an unrounded basis, is mostly shelter, and shelter's step-up is not the slow-moving housing the Fed treats as the signal.

Shelter rose 0.3% in August after 0.1% in July and is up 3.0% on the year. Owners' equivalent rent, the largest single line in the CPI, rose 0.2%, as did rent of primary residence. Lodging away from home rose 2.4% after falling 2.8% in July. That rebound is what turned a 0.1% shelter print into a 0.3% print.

All items less food, shelter, and energy, a BLS special aggregate covering about 44% of the basket, rose 0.3% for a second straight month and is up 2.0% on the year. July's softer 0.2% core reading was the low shelter print; the rest of core was already running at 0.3%. August did not heat that residual up. It let shelter catch up. Motor-vehicle insurance fell 0.8%, one reason the residual stayed at 0.3% instead of moving higher.

Services less energy services, a watchlist series for the Fed, rose 0.3% after 0.2% in July and is up 3.0% on the year. Core goods, commodities less food and energy, rose 0.1% and are up only 0.7% over 12 months.

Monthly figures are seasonally adjusted; the 12-month rates are not, which is how the BLS publishes them. Core was unchanged in June, up 0.2% in July, and up 0.3% in August.

With the acceleration in a component the Fed excludes, the long end did not cheapen with the hike.