Consumer prices rose 0.4% in August and 1.9% from a year ago, lifted by a rise in energy prices, the Labor Department reported on Thursday.
The core consumer price index, excluding food and energy, rose 0.2%, while the annual rate of inflation held at 1.7%.
XWall Street expected the headline CPI to rise 0.3% on the month and 1.9% from a year ago, with the core CPI up 0.2% and 1.6%.
The monthly gain was the biggest since January.
The 10-year Treasury yield continued to rebound higher before the CPI release, then added to the gain after the report. Futures for the s&P 500 index, Nasdaq 100 and Dow industrials retreated on the stock market today after trading little changed before the 8:30 a.m. ET inflation data.
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Investors may see Federal Reserve interest rate hikes as somewhat more likely sooner, though that no change is expected in the near term. The Fed is seen beginning to curb its massive balance sheet at next week's policy meeting.
Food at home prices fell 0.2% on the month, which saw Amazon.com (AMZN) complete its Whole Foods Markets acquisition and immediately cut prices on items like kale and avocados by up to 43%. It's not clear if the Bureau of Labor Statistics picked up those price cuts that didn't hit until Aug. 28. Target (TGT) followed last week by announcing it's own plan to slash prices. Prices for food away from home rose 0.3%.
Higher energy prices, even before Hurricane Harvey disrupted gasoline output, fueled the overall CPI gain, rising 2.8%.
IBD'S TAKE: IBD readers were ready for the stock market's push to record heights this month. On Aug. 22, IBD shifted its market trend gauge to "confirmed uptrend" from "uptrend under pressure," the equivalent of a flashing yellow light turning green. Read IBD's The Big Picture column each day to stay on top of the market direction, a key indicator that lets you know when you can be aggressive and when you should move to the sidelines.
Inflation readings remain well below the Federal Reserve's target amid competitive pressures in a broad range of industries.
CVS Health (CVS) said last month that it saw flat same-store prescription volumes in the second quarter, but pharmacy same-store sales fell 2.8%, dragged down by recent generic introductions.
While drug pricing moderation from generic competition often comes in waves, this wave is likely to be more sustained amid the FDA's new plan to expedite review of generic drug applications.
"We're already seeing results, as May and June of this year have seen the most generic drug approvals since the FDA began tallying its monthly approvals," CVS CEO Larry Merlo said on an August 8 conference call.
Marriott International (MAR) CEO Arne Sorenson explained on an earnings call last month that the hotel group doesn't have as much ability to raise prices as it had in past cycles. While home-sharing via Airbnb has some impact on leisure travelers and business travel is pretty good, not great, he sees the bigger issue as "radical transparency in pricing."
"It's not particularly focused on home sharing or the disrupters in the space," Sorenson said. "It's much more about just the ubiquity of information. And I think with each passing year, it becomes simpler and simpler to know the rates at every single hotel."
After two years of resisting price increases, Wendy's (WEN) said it raised prices a slim 1% this spring quarter, even as it faces 4% wage inflation and higher commodity costs. Even with the price increase, margins at company-operated restaurants fell to 19.6% in the second quarter from 21.9% a year ago.
"Our biggest competitor is food at home," said CEO Todd Penegor, which helps explain why Wendy's has remained so conservative on pricing.
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