The US inflation rate was higher than forecast in August, keeping up pressure on the Federal Reserve for a large interest rate rise this month and triggering a dramatic sell-off on Wall Street.

The consumer price index increased 0.1 per cent for the month, above economists’ expectations for a 0.1 per cent drop, as a fall in energy costs failed to fully offset increases in services and other spending categories

The figures, published by the Bureau of Labor Statistics, also contrasted with July, when prices did not rise on the previous month.

On an annual basis, headline inflation is running at 8.3 per cent, down from 8.5 per cent in July, but still near a four-decade high. Economists expected a reading of 8.1 per cent.

Wall Street was caught off guard by the hotter-than-expected inflation figures. The S&P 500 tumbled 3.1 per cent during morning trading on Tuesday, while the Nasdaq Composite, which is stacked with technology companies that are more sensitive to changes in interest rate expectations, was down more than 4 per cent.

In government debt markets, the yield on the 2-year US Treasury, which is more sensitive to policy expectations, surged to be up 0.17 percentage points at 3.75 per cent, having traded at 3.52 per cent before the release of the inflation data.

The odds the Federal Reserve would opt for a full percentage point rate rise in September rose to 18 per cent, according to CME Group, although most economists forecast a 0.75 percentage point rate rise as the most likely outcome.

“We don’t really see anything in here that would make the Fed want to opt for a slower pace of rate hikes this month,” said Brian Coulton, chief economist at Fitch Ratings.

The surprising jump came despite petrol prices having tumbled in recent months. Earlier this summer, they topped a record $5 a gallon following a jump in oil prices after Russia’s invasion of Ukraine. The current national average is $3.70, according to the American Automobile Association.

However, once prices for energy and food are stripped out, core CPI rose further. Between July and August, it increased 0.6 per cent, translating to an annual increase of 6.3 per cent. That is up from the 5.9 per cent recorded during the previous period.

The latest CPI report is the last big data release before the US central bank’s next policy meeting, at which officials are expected to implement a third consecutive 0.75 percentage point rate rise.

That rise would lift the fed funds rate to a new target range of 3 per cent to 3.25 per cent. Futures markets now suggest that by the end of the year the benchmark policy rate will settle above 4 per cent.

Petrol prices dropped 10.6 per cent in August, leading to a 5 per cent decline in the overall energy prices. Airlines fares fell 4.6 per cent, after tumbling 7.8 per cent in July, while prices for used cars also dropped.

A 0.7 per cent jump in shelter-related costs counteracted those declines, however. Year-over-year, they are up 6.2 per cent. Food prices increased 0.8 per cent, following July’s 1.1 per cent jump, translating to an 11.4 per cent annual rise.

Owing to higher prices across the transportation services sector as well as those for medical care, services inflation ex-energy rose 0.6 per cent, or 6.1 per cent higher from the same time last year.

In recent weeks, Fed policymakers have reaffirmed their commitment to bringing inflation under control, emphasising the risks associated with allowing price pressures to persist.

Failing to bring down inflation, and allowing expectations of future price increases to spiral, was likely to mean more economic pain later on, chair Jay Powell and vice-chair Lael Brainard warned last week.

As petrol prices have fallen, so too have expectations about future inflation. Data released by the New York branch of the Fed on Monday showed that households now expect inflation to settle at 5.7 per cent in a year’s time, down from 6.2 per cent.

Policymakers worry this downward trend will not be sustained, however, especially if energy prices jump later this year. Treasury secretary Janet Yellen warned of that possibility over the weekend, citing concerns about a widespread shortage across Europe as the bloc stops buying oil from Russia.

Christopher Waller, a governor who sits on the Federal Open Market Committee, said on Friday that he supported “another significant increase” to the benchmark policy rate at the September gathering. He noted that the US economy’s resilience and the strength of the labour market gave the Fed “the flexibility to be aggressive” in its fight against inflation.

US president Joe Biden is expected to host an event at the White House on Tuesday afternoon to celebrate the passage of the Inflation Reduction Act — a package of measures approved by Congress in August that includes incentives for clean energy and some higher taxes on the wealthy and large companies. While economists do not believe the legislation will have an immediate effect on inflation, it could ease price pressures over the longer term.

High inflation has dogged the economic recovery for months, handing Republicans an advantage heading into midterm elections in November.