US core CPI rises as expected, keeping Fed on track for rate cut

NEW YORK – Underlying US inflation rose as expected in August, keeping the Federal Reserve on track to cut interest rates next week.

The core consumer price index (CPI), excluding the often volatile food and energy categories, increased 0.3 per cent from July, according to Bureau of Labour Statistics (BLS) data out on Sept 11. When incorporating those components, the overall CPI rose 0.4 per cent, the most since the start of the year.

The prices of goods, excluding food and energy commodities, accelerated. That reflected price increases in new and used cars, apparel and appliances. Within services, airfares surged the most in over three years. Several household expenses also picked up, including groceries, petrol, electricity and car repairs.

The report suggests inflation continues to linger. President Donald Trump’s global tariffs are impacting prices of some goods, while ongoing increases in services costs may present a more persistent pressure to overall inflation.

Even so, Fed officials are widely expected to cut interest rates for the first time in 2025 at their meeting next week, after a series of weak employment data. But firm inflation, if sustained, may complicate the path for additional reductions at subsequent meetings.

Stock futures held gains and Treasuries rallied. Policymakers will see the latest data on consumer sentiment and retail sales before their Sept 16-17 meeting. Traders expect the Fed to also cut rates two more times in 2025 after that.

One of the key drivers of inflation in recent years has been housing costs – the largest category within services. Shelter prices picked up by 0.4 per cent, the most since the start of the year and reflecting advances in both rents and the largest jump in hotel stays since November.

Another services gauge closely tracked by the Fed, which strips out housing and energy costs, stepped down somewhat, helped by declines in medical care, recreation and car rentals. While central bankers have stressed the importance of looking at such a metric when assessing the overall inflation trajectory, they compute it based on a separate index.

That measure – known as the personal consumption expenditures (PCE) price index – does not put as much weight on shelter as the CPI. The PCE draws from the CPI as well as another release on producer prices, which showed categories that feed into the PCE were mixed.

The watchdog for the Labour Department, which oversees the BLS, said on Sept 10 it was initiating a review of the agency’s challenges in collecting and reporting key economic data. In recent months, BLS has had to suspend CPI data collection in several US metro areas and increasingly rely on a technique to fill in the gaps. The review will also examine BLS’ revisions to jobs data, which have garnered more widespread criticism, particularly from the White House.

Central bankers also pay close attention to wage growth because it can help inform on expectations for consumer spending – the main engine of the economy. A separate report out on Sept 11 that combines the inflation figures with recent wage data showed that real average hourly earnings climbed 0.7 per cent from the year before, the weakest in over a year.

Another release showed initial applications for US unemployment benefits jumped last week to the highest level in almost four years. Weekly filings can be volatile around holidays, and the week’s figures included Labour Day. BLOOMBERG