US inflation jumps to 2.9 per cent, setting up key rate decision
US inflation edged up to 2.9 per cent in August, leaving the Federal Reserve with a difficult decision to make on interest rates next week and all but vanquishing any chance of a ‘super-sized’ 50 basis-point cut.
The Bureau of Labor Statistics said on Thursday that the annual consumer price index (CPI) figure for inflation rose higher compared to July, when inflation was 2.7 per cent.
The latest reading matched consensus forecast. Core inflation stayed at 3.1 per cent, which was also in line with expectations.
Traders widely expect the Fed to cut interest rates by 25 basis points next week in what will be one of the most closely watched interest rate decisions in Federal Reserve history.
The Fed’s rate is crucial for the global economy given the size of US spending and the collateral effects borrowing costs can have on major powers, with higher bond yields on the US Treasury hitting markets in Europe and Asia.
Lindsay James, investment strategist at Quilter, said fresh data was not a shock and made an interest rate cut next week “near certain”.
“It remains hard to discern that tariffs are having a broad impact on the level of prices and how much of it is other economic forces playing out at the same time,” James said.
“What is clear is that corporates are still having to digest the multiple and ongoing changes to tariffs and as such some of that will be absorbed by the companies themselves, while some may pass on price rises when the time is right and the environment is more predictable.
“Should inflation remain in check, markets will be clamouring for more despite it remaining well above the two per cent target.”
Sticky inflation tests central banks
Minutes before US inflation data was revealed, the European Central Bank opted to hold interest rates on deposits at two per cent.
Economists said future cuts may yet come but the outlook on growth and inflation remained stable.
“The big risk is the impact that US tariffs and associated uncertainty will have on the eurozone,” said Thomas Pugh, chief economist at the consultancy firm RSM.
“A combination of a hit to investment and exports, a stronger euro along with cheaper imports from China could dampen growth and inflation by enough to warrant another rate cut later this year.”
The Bank of England will make its own decision on interest rates next week, a day after the Fed. Inflation in the UK has been stickier than in other developed economies, with markets believing monetary policymakers will keep interest rates at four per cent for the rest of this year.