Gasoline prices drive up US monthly inflation; four UK interest rate hikes expected by next summer – business live

Time to wrap up.

Interest rate hikes on both sides of the Atlantic look more likely than at the start of the week, after the latest rush of economic data.

In the US, prices picked up in August, lifting the CPI index by 0.4% on a monthly basis, but leaving annual inflation unchanged at 3.4%.

Gasoline prices jumped – up 3.9% in August, and over 27% compared with a year ago.

Lettuce prices slumped, though, as a food poisoning outbreak hit demand for salads.

With prices rising much faster than the Federal Reserve's annual target of 2%, many (but not all) economists expect the Fed to raise interest rates at its meeting next week.

According to CMEFedwatch, a quarter-point hike from the Fed next Wednesday is now an 86% probability, up from 69% before the inflation report was released.

In the UK, better-than-expected growth figures has cheered the City today – but could also encourage some Bank of England policymakers to lift borrowing costs.

The British economy beat expectations with 0.4% growth in July, partly thanks to increased AI activity within the services sector.

Martin Beck, the chief economist at WPI Strategy, said:

“At a time when many traditional parts of the economy remain subdued, this is exactly the kind of productivity-enhancing spending the UK needs more of.â€

But British borrowers could face a squeeze in the coming months – the money markets are now anticipating four interest rate rises by July 2027, up from three at the start of this week.

In the energy world, oil and gas prices have dropped on hopes of a breakthrough to reopen the strait of Hormuz. But Europe still faces a battle to stock up on gas before the winter.

It is still far from certain that Kevin Warsh and the Fed will hike next week, argues Professor Costas Milas of the University of Liverpool's management school.

But Donald Trump could yet tip the balance, if he starts lobbying against a rate rise.

Prof Milas tells us:

The probability, following today's reading, for raising interest rates has shifted (in my view) to 55%. But if Trump starts bombarding with social post messages of the type: “Don't raise rates†or even “Lower ratesâ€, the Fed will definitely hike to send the powerful message that they don't get “orders†from Trump.

Back in London, the stock market has recorded its first daily rise in over a week.

After five daily falls in a row, the FTSE 100 share index has ended the day up 41.5 points or 0.4% at 10,650 points.

That still leaves the index of blue-chip shares down 1.67% this week, its worst week since 2-6 July.

This month's drop in US consumer confidence (see earlier post) is a warning sign for Republicans ahead of the Midterm elections, says James Knightley, chief international economist at ING:

The September measure of University of Michigan consumer sentiment is very poor, dropping to 47.8 from 51.7 (consensus 51.0). This is the second weakest reading on record and this series goes back to the 1970s – the weakest was only in May. The damage came from the expectations component, which fell to 45.8 from 51.5. That level has historically been consistent with real consumer spending growth of -2% annualized. Ordinarily we are in recession territory here, but there has been a breakdown in the relationship with consumer spending due to the fact that high income households are dominating the spending story right now.

Middle and lower income households, whose views are picked up in the surveys, are under intensifying financial pressure as wages fail to keep pace with the cost of living. We can also see it in the low savings ratio and the rising credit card and auto loan delinquency numbers.

Worryingly for the Republican Party ahead of the Midterm elections, it is its supporters who have seen the biggest drop in sentiment over the past 12 months – down 20 points versus a five point decline for Democrat supporters.

Capital Economics, the City consultancy, have concluded that the Federal Reserve will hike interest rates next week.

They say:

The firm August price data means we are reinstating our prior forecast that the Fed will hike this month and by 75bp in total. That would take the Fed funds target range to between 4.25% and 4.50%.

The index for US communication costs increased by 2.3% in August, after rising 0.6% in July.

Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, says:

“US inflation surprised to the upside in August, with core consumer price index (CPI) rising a firm +0.29% month on month (M/M) and the annualised rate just about rounding down to 2.4% Year on Year, from 2.5% last month. Artificial intelligence (AI) linked components showed strong performance which is not surprising.â€

US consumer confidence has fallen again, as Americans grow more worried about inflation.

The University of Michigan's consumer sentiment index, just released, has dropped by almost four points to 47.8 points this month, down from 51.7 in August – the second consecutive month of decreases.

The survey found that consumer expectations have fallen this month, and that people are also gloomier about current economic conditions.

Surveys of Consumers director Joanne Hsu explains:

Democrats and Republicans alike posted sizable declines, while independents were little changed from August. Year-ahead expectations for both personal finances and business conditions plunged. With a resurgence in fuel prices and trade tensions, consumers anticipate greater pressures on their pocketbooks to come.

Overall, sentiment is now 16% below February, prior to the start of the Iran conflict, and 13% lower than a year ago, Hsu added.

Investors may feel that the US Federal Reserve would bolster its credibility as an inflation-fighting central bank by hiking interest rates next week.

That would explain why the US stock market has opened higher, explains Janet Mui, head of market analysis at RBC Brewin Dolphin:

Markets have responded quickly, as they priced in the probability of a rate hike next week from 70% before the CPI release to 90% immediately afterwards. Interestingly, bond yields edged lower and stocks reacted positively. The likely interpretation is that if the Fed does follow through with a rate hike to restore inflation credibility, that would help anchor long-term inflation expectations and be seen as a positive development.

Given the ECB has hiked, alongside the recent data and market pricing, it would be a surprise if the Fed remained on hold next week. If it doesn't, the Fed will face a serious credibility challenge and Fed chair Warsh will need to explain its rationale clearly to the market.â€

The US stock market doesn't appear concerned by today's inflation report, or the rising chance of an interest rate hike next week.

The Dow Jones industrial average has jumped by 622 points, or 1.2%, to 52,688 points at the start of trading in New York.

The broader S&P 500 index is up 1.05%.

Jon Butcher, senior US economist at Aberdeen reckons the jump in monthly core inflation will seal a US interest rate rise next week:

“A Federal Reserve hike next week is now looking highly likely. Today's CPI data showed core prices re-accelerating in August, rising by an above consensus 0.3% month on month. This removed the main obstruction to a rise in the fed funds' rate next week, that price data had been showing a disinflationary trend.

We have seen a divided FOMC in the past weeks, with some members calling for hikes now, while others suggested that they would vote to remain on hold unless upside inflation risks materialised. As things stand today, the inflation data suggest those upside risks are manifesting. And with oil prices above $100 per barrel and no end to the conflict in the Middle East on the near-term horizon, inflation risks remain firmly tilted to the upside.

Stephen Coltman, Head of Macro at 21shares argues the Federal Reserve will feel pressure to raise rates next week:

The Fed would not normally be looking at rate increases given a core CPI of just 2.4%, but with the trend in “Supercore†(excluding housing) coming in hotter than expected, and with high oil prices boosting the headline, the committee will likely feel pressured to hike next week in order to show it is being responsive.

I think the Fed would have liked more time to see how recent increases in yields are affecting the economy, where consumers are already under pressure amid slowing wage growth and what feels like a tax increase from higher energy prices, but today's number has likely forced their hand.

Investors believe the US Federal Reserve is more likely to raise US interest rates next week following August's inflation report.

Market odds on a rate increase at the Fed's meeting next week have risen to 82% after earlier touching 90%, Reuters reports. Before the report the market was placing 68% odds on a rate hike on 16 September.

Anthony Willis, senior economist at Columbia Threadneedle, believes a hike next week is a ‘done deal':

“Expectations for a US rate hike were already climbing after the strong jobs data last week. Historically the narrative was that the Fed would ‘nudge' market expectations towards at least 70% probability before a policy move, such that policy ‘shocks' were limited. However, in the new Kevin Warsh era, they appear comfortable to play their cards close to their chest.

“Over the course of this week, helped by higher commodity prices, expectations for a Fed hike had climbed to the 70% level. Given how much weight Warsh has put on the inflation data, and his frustrations with inflation persistently above target for over five years, today's CPI print felt like the final piece in the jigsaw for a potential policy move next week. In the aftermath of the August CPI release, a Fed hike now appears to be a done deal, with markets now pricing a 93% probability the Fed will hike next weekâ€.