August's uptick in prices won't be enough to prompt a course change at the Federal Reserve, several economists said, matching Wall Street's muted reaction Wednesday after the latest inflation data came in slightly hotter than expected.
Consumer prices edged higher in August as a surge in oil prices fueled an uptick in headline inflation, according to data from the Bureau of Labor Statistics. The Consumer Price Index (CPI) rose 0.6% over last month and 3.7% over the prior year in August, an acceleration from July's 0.2% monthly increase and 3.2% annual gain in prices. The year-over-year increase was slightly higher than economist forecasts of a 3.6% annual increase, according to data from Bloomberg.
The market took August's elevated reading in stride. The S&P 500 (^GSPC) edged higher by about 0.3%, while the Dow Jones Industrial Average (^DJI) increased about 0.2% during morning trading. The tech-heavy Nasdaq Composite (^IXIC) advanced 0.3%.
According to the CME FedWatch Tool, the probability that the Fed will pause its rate hikes next week rose to 97%, up from 92% a day ago.
Read more: What the latest Fed rate hike plan means for bank accounts, CDs, loans, and credit cards
"Ultimately this release showed that there is still real work to be done to get inflation back to the Fed’s 2% target," said Sam Millette, fixed income strategist for Commonwealth Financial Network. "However, the higher-than-expected consumer inflation in August is not expected to lead to a rate hike at the Fed’s meeting next week."
How the Fed responds to new economic data showing elevated prices has widespread ramifications for the market. In recent months, observers have adopted a more optimistic outlook toward the Fed's policy response to inflation, which has moderated historic inflation levels while skirting a recession. But the Fed's work remains a delicate balancing act. Further signals that inflation is not slowing fast enough could put pressure on central bankers to enact more painful measures to constrain the economy.
The rise in gas prices accounted for more than half of the increase in consumer inflation. Gyrations in the energy market highlight how geopolitical factors, while hugely influential to the US economy, are beyond the control of the Fed. But central bankers still have to grapple with them. Saudi Arabia and Russia recently announced an extension of unilateral output cuts through the end of the year, amplifying worries of global supply.
"These are geopolitical events that are driving energy prices and this is a good reminder that today, it is not all about the Fed in terms of policy responses," Claudia Sahm, former Federal Reserve Board economist and founder of Sahm Consulting, told Yahoo Finance Live.
Wall Street's lukewarm greeting of the latest data suggests the Fed won't adopt a more hawkish approach to taming inflation at next week's Federal Open Market Committee and that the central bank will continue its wait-and-see approach leading into its next huddle in November.
In a note on Wednesday, Nancy Vanden Houten, the lead US economist at Oxford Economics, said that she expects the slowing economy, cooling labor market, and moderating wage growth to further decelerate inflation, "allowing the Fed to keep policy steady until it begins to gradually cut rates in mid-2024."
The uptick in inflation still leaves the door open for future rate hikes, several experts said, especially if oil prices continue to climb.
"This isn’t the goldilocks number that investors were hoping for, but markets can still trade in a range — as inflation is high enough to keep the Fed still in play, but not hot enough for a shift away from the 'Fed is almost done' narrative," Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said in a note on Wednesday.
Read more coverage on where inflation stands:
Stocks edge up after inflation data comes in hot: Stock market news today
Inflation: Grocery prices ticked up slightly in August, but egg prices continued falling
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on Twitter @hshaban.
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