The numbers: Falling gas prices last month delivered a second low 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 U.S. interest rates again soon.
Economists polled by The Wall Street Journal had forecast a 0.1% drop in the CPI.
In a more worrisome sign, the so-called core rate of inflation that omits food and energy 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, housing, medical care, home 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.
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.
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 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-point increase is on tap.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
reversed course in premarket action and turned sharply lower. The 10-year bond
TMUBMUSD10Y,
jumped to 3.42% from 3.31% after the report.