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Economic Report: U.S. inflation roars back in August, CPI shows, despite falling gas prices

The numbers: Falling gasoline prices last month delivered a second low U.S. inflation reading in a row as the consumer price index rose by just 0.1% in August. But the report also shows inflation has spread more broadly through the economy and is set to spur the Federal Reserve to sharply raise interest rates again.

Economists polled by The Wall Street Journal had forecast a 0.1% drop in the CPI.

The small increase in the main CPI last month, meanwhile, lowered the yearly rate of inflation to 8.3% from 8.5% in July and 9.1% in June. The June reading was the highest since 1981.

In a more worrisome sign, the so-called core rate of inflation that omits food and energy prices rose by a sharp 0.6%. Wall Street had forecast a 0.3% gain.

The Fed views the core rate as a more accurate measure of future inflation trends.

The increase in the core rate over the past year escalated to 6.3% from 5.9%, underscoring how much inflation has become embedded in the economy. The cost of staples such as food, rent, medical care, furnishings and new cars all rose last month.

By contrast, inflation rose an average of less than 2% a year in the decade preceding the pandemic.

Big picture: The Fed is expected to boost interest rates through the end of 2022 to try to extinguish the worst inflationary fire in four decades, but it has a long way to go to return to pre-pandemic levels.

The central bank risks a U.S. recession if it goes too far, however. Higher interest rates reduce inflation by raising the cost of borrowing for consumers and businesses and thereby slowing the economy.

The central bank is primed for another supersized rate increase at its next meeting on Sept. 20-21 in Washington. The disappointing CPI report suggests another three-quarter percentage point increase is on tap.

Key details: The tepid headline CPI readings in August and July stemmed mostly tumbling gasoline prices. The government said gasoline prices fell 10.6% last month. The average U.S. cost of a gallon of gas, which topped $5 for the first time ever in June, fell to $3.83 at the end of August.

It’s since declined to $3.69 in September, the Energy Information Administration reported, suggesting another low headline inflation reading in the next CPI report.

The rest of the August report, however, was filled with warnings signs on inflation.

The cost of groceries jumped again last month and they are up 11.1% in the past year — the biggest increase since 1979.

Rent surged 0.7% in August, as did housing. The Fed is especially worried about rising rent since it’s one of the biggest contributors to inflation and shows little sign of reversing.

Rents have risen 6.3% in the past year to mark the biggest gain since 1990.

More bad news: Medical care is getting more expensive again after prices flattened out during the pandemic. The cost of care has leaped 5.4% in the past year, the largest increase since 1993.

Prices also rose last month for almost everything else, with the exception of airlines fares and used vehicles.

The one bit of goods news: Inflation-adjusted wages rose 0.2% in August to mark the second increase in a row. Real wages have fallen 2.8% in the past year, however.

Looking ahead: “Underlying inflation pressures remained intense in the August CPI report, virtually guaranteeing another outsized rate hike from the Fed next week,” said senior economist Sal Guatieri of BMO Capital Markets.

Market reaction: U.S. stocks opened sharply lower Tuesday as investors reacted to a stronger-than-expected inflation reading for August. The Dow Jones Industrial Average

  dropped more than 500 points, or 1.7%, soon after the opening bell, while the S&P 500

  fell 2.2% and the technology-heavy Nasdaq Composite

 dropped 2.9%, according to FactSet data.

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