U.S. Consumer Prices Rose 0.4% in August -- 2nd Update

By Josh Mitchell Features Dow Jones Newswires

U.S. consumer prices rebounded in August, a sign of economic vigor that could nudge the Federal Reserve closer to raising a key interest rate.

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The consumer-price index, which measures what Americans pay for everything from medicine to cars, grew 0.4% from a month earlier, the biggest jump since January, the Labor Department said Thursday.

Much of the gain owed to a sharp rise in gasoline prices caused by Hurricane Harvey, which temporarily shut Texas refineries. But a range of other prices, particularly home rent and housing costs, also increased. Excluding food and energy, so-called core prices grew 0.2%, the most since February.

Thursday's report -- the final inflation gauge before Fed policy makers meet next week -- could bolster a view within the central bank that a drop in inflation earlier this year would be short-lived. Cellphone-plan prices, for example, fell early in the year due to industry competition, and hotel rates, which tend to be volatile, dropped in July but picked up last month.

Core prices have risen a modest 1.7% over the past year but since June have climbed at an annual rate of 1.9%.

"After a five-month hiatus core inflation came back to life in August," J.P. Morgan economist Michael Feroli said in a note to clients. "Today's report should ease some of the low inflation concerns among wavering FOMC officials, and we continue to expect the leadership will prevail in getting another (interest rate) hike in at the December meeting." The Fed's FOMC, or the Federal Open Market Committee, sets monetary policy.

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Barclays analysts added that "the August report should assuage concerns in some parts of the (Fed) that the underlying rate of inflation has fallen too far" and bolstered the case for a December rate increase.

Fed officials have raised their benchmark interest rate twice this year and have indicated they expect to do so again, perhaps in December, if they see signs of higher inflation and a strong labor market. The Fed targets annual inflation of 2%, as measured by a separate Commerce Department index.

The labor market continues to exhibit strength, with unemployment -- at 4.4% in August -- staying below the Fed's long-term projections.

Inflation remains weaker than early this year. Overall prices rose 1.9% in the year through August, up from July's rate of 1.7% but below January's pace of 2.5%, according to Thursday's report. Fed officials initially played down softer inflation pressures earlier this year, which they expected would prove transitory. Thursday's report is the first to provide evidence of that, which could make it easier for them to maintain forecasts that show inflation heading back toward its target over the coming year.

One complicating factor is that inflation numbers -- along with other economic data -- will be skewed in coming months because of Hurricanes Harvey and Irma. Prices for lumber, for example, could rise temporarily as communities repair damage from the storm. That would make it difficult for the Fed to distinguish between temporary and underlying trends.

Thursday's report showed energy prices rose 2.8% in August from a month earlier, driven by higher gasoline prices.

Food prices grew 0.1% over the month, while shelter prices, a measure of rent and mortgage payments, increased 0.5%.

Meanwhile, Americans' earnings haven't accelerated significantly, one potential sign the economy still lacks vigor. Average weekly earnings, after inflation, fell 0.6% in August from July, the Labor Department said in a separate report Thursday. While hourly earnings rose, higher inflation more than offset the gain, and the average workweek declined.

Write to Josh Mitchell at joshua.mitchell@wsj.com

(END) Dow Jones Newswires

September 14, 2017 14:28 ET (18:28 GMT)