Gasoline Lights Up US Inflation In August; Underlying Trend Steadily Improving

US consumer prices rose by the most in 14 months in August as the cost of gasoline spiked, but the annual rise in underlying inflation was the smallest in nearly two years, likely giving the Federal Reserve cover to leave interest rates unchanged next Wednesday.

The mixed report from the Labor Department on Wednesday was published a week before the Fed's policy meeting and followed data this month showing an easing in labor market conditions in August. Economists, however, believe officials at the U.S. central bank will continue to signal an additional rate hike this year given the stickiness in services inflation.

"There is nothing here to seriously put a Fed rate hike on the table next week, but there is enough to keep the debate about the need for one more hike in 2023 alive," said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.

The consumer price index increased by 0.6% last month, the largest gain since June 2022, after rising 0.2% for two straight months. August's increase in the CPI was in line with economists' expectations.

Gasoline prices, which jumped 10.6% after climbing 0.2% in July, accounted for more than half of the increase in the CPI. Gasoline prices accelerated in August, peaking at $3.984 per gallon in the third week of the month, according to data from the U.S. Energy Information Administration. That compared to $3.676 per gallon during the same period in July.

The cost of shelter continued to rise, though rents are moderating. Food prices gained 0.2% for the second straight month. Grocery food prices rose 0.2%, slowing from June's 0.3% advance as more expensive meat, fish and eggs were partially offset by cheaper dairy products, fruit and vegetables.

In the 12 months through August, the CPI accelerated 3.7% after climbing 3.2% in July.

While that marked the second straight month of a pick-up in annual inflation, year-on-year consumer prices have come down from a peak of 9.1% in June 2022.

Stocks on Wall Street rose. The dollar was steady against a basket of currencies. U.S. Treasury yields were mostly lower.

"As long as the economy remains resilient and inflation doesn't re-ignite, the market can rally into year-end, once we get past the seasonally weak months of September and October," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.

(With Inputs from Reuters)