Fed gets an August inflation curveball to keep hikes alive

investing.com:

By Howard Schneider

WASHINGTON (Reuters) — Federal Reserve officials hoping for evidence of a clear decline in inflation and a slowing economy got some of each from data since their last meeting, but likely not enough of either to downplay the possible need for further rate increases later this year.

Overall consumer prices rose month-over-month at the fastest pace in 14 months in August, and while that was driven largely by volatile energy costs, a measure of underlying inflation also accelerated unexpectedly.

While economists believe inflation trends are still moving in the Fed's favor, August represented the sort of surprise that would keep officials leaning towards at least one additional rate increase to be reflected in new economic projections at the end of their upcoming Sept. 19-20 meeting.

Month-to-month inflation numbers «will inevitably hop around,» wrote Pantheon Macroeconomics Chief Economist Ian Shepherdson, who sees underlying consumer inflation nevertheless slowing to a «benign» level of below 3% by early next year.

At next week's meeting «we expect the Fed to remain on hold but to signal willingness to hike again depending on the data,» he said, an outlook largely shared by investors who see the Fed keeping the benchmark policy rate at the current range of 5.25% to 5.5%.

A new Summary of Economic Projections released after the meeting will show if the majority of policymakers still anticipate one further quarter-point increase by the end of the year, as in their June outlook. Since their meeting in July, only two Fed policymakers have said they felt rates do not need to rise further, while others noted their outlook for slowing inflation was built around a slightly higher federal funds rate.

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