Inflation: CPI rose in August even as gasoline prices fall

Consumer prices in August climbed 0.1 percent from the previous month, as food and housing costs rose for millions of Americans.

A number of economists had hoped that the drop in energy prices over the past few weeks would be enough to finally calm inflation, but government data released on Tuesday showed how strong price increases continue to persist on the markets. basic items that form a central part of most families’ budgets.

The figures come from the Bureau of Labor Statistics, which released its monthly consumer price index. It showed prices rose 8.3% in August from 12 months earlier, more than analysts expected. The headline figure was lower than the rate of inflation recorded in the previous two months, but still higher than expected given the sharp decline in gasoline prices in recent weeks.

“We thought inflation would start to come down, and instead we’ve seen really entrenched inflation,” said Betsey Stevenson, professor of public policy and economics at the University of Michigan and former White Fellow. Council of the Chamber of Economic Advisors. “If there’s no real progress, then it says, ‘should the Fed take stronger action?’ And if the Fed needs to take stronger action, what does that mean for the risk to people’s livelihoods?

Inflation has been high for more than a year, due to a wave of global supply chain problems, strong consumer demand for all kinds of goods and services and the invasion of Ukraine by Russia. Federal Reserve rate hikes dampened price growth in some sectors. But the August report highlighted how inflation, over time, simply breeds more inflation. The longer it takes to zap growth in the prices of food or new cars, for example, the harder it will be to contain inflation, let alone bring prices back to pre-pandemic levels.

The stock market fell sharply on the news as investors feared the new data would encourage Federal Reserve officials to continue raising interest rates next week in a bid to curb inflation. The Dow Jones Industrial Average opened down nearly 600 points, or 1.8%, while the tech-heavy Nasdaq slipped nearly 3%.

Americans are finally feeling better about the economy

Policymakers, economists and the American public are eager to see consistent signs that inflation peaked this summer after hitting a 40-year high, cutting household budgets for everything from groceries to medical care.

Looking ahead, officials are also worried about how the global fight to tame inflation could be thwarted by a looming energy crisis in Europe, amid threats by Russian President Vladimir Putin to force a bleak winter on the continent.

The monthly CPI report released on Tuesday did not provide much reassurance that August brought major progress. The food index rose 11.4% over the past year, the largest 12-month increase since May 1979. Food prices rose 0.8% over the past month. Flour increased by 2.2%, potatoes by 2.5%, butter by 1.9% and canned fruit by 3.4%.

The housing index continued to rise, rising 0.7% in August from 0.5% in July. The rent increased by 0.7%.

The Fed and some economists prefer to focus on a measure of inflation known as “underlying inflation,” which eliminates the most volatile categories like food and energy. Costs for housing, medical care, new cars and furnishings all rose from the previous month. Prices for water and garbage collection services, hospital services and prescription drugs have also increased.

“We’re seeing services that aren’t housing, that aren’t energy services, that the rate of inflation is going up, and that worries people because that’s indicative of higher entrenched inflation,” Stevenson said.

There were a few exceptions. The gasoline index fell 10.6% as prices at the pump fell from their summer highs. The costs of plane tickets and used cars have also fallen.

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Inflation is the biggest problem in the economy, and its consequences are felt the hardest by vulnerable families who have little room to absorb higher costs.

The Federal Reserve has fought inflation by raising interest rates, which aim to slow the economy by making all kinds of investments and loans — from mortgages to car loans to hiring — more expensive. The Fed’s goal is to use higher rates to dampen demand in the economy, especially since its tools can’t do anything to address issues such as supply chain blockages, labor shortages or the war in Ukraine.

Prior to the latest inflation report, markets were already expecting the Fed to hike rates by three-quarters of a percentage point at its policy meeting next week. It now appears to be completely locked down.

Americans are finally feeling better about the economy

However, the fight against inflation has far-reaching consequences and could possibly shake the economy too forcefully, triggering a recession and a new wave of job losses. Yet the Fed has sent a clear message: it is continuing.

“While higher interest rates, slower growth and looser labor market conditions will reduce inflation, they will also hurt households and businesses,” said Fed Chairman Jerome. H. Powell, in a well-attended speech last month. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

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Inflation also plays a political role, influencing midterm elections. The Biden administration has been hammered by Republicans for sprawling stimulus efforts from the start of the pandemic that helped boost the economy. And this summer, soaring gas prices in May and June further soured Americans’ feelings about the economy, sending consumer confidence plummeting and pushing down the president’s poll numbers. Biden. But gas prices have been on a steady decline. After topping $5 in June, the national average for a gallon of gasoline was $3.70 on Tuesday, according to AAA.

“The fact that the core [inflation] came in above expectations is just a reminder that price pressure remains unacceptable and that the president’s three-tiered approach is more relevant than ever,” said Jared Bernstein, member of the Council of Economic Advisers. of Biden, to the Post. “Nurturing independence, doing what we can to help family budgets and reduce the deficit.

Republicans have sought to frame their medium-term policy message around inflation as they vie for control of the House and Senate. Yet inflation has recently lost traction with voters, especially as gas prices have consistently fallen from their summer highs and the labor market is still in full swing.

Indeed, Americans are starting to feel better about the economy and consumer confidence, which plummeted in June, has picked up. Lynn Farrell, president and owner of Chicago-based Windy City Travel, said business was booming, especially for luxury travel. People want to fly first class after an extended vacation. Farrell will put together safari packages for customers looking for even more extravagant trips.

Airfares have fallen after their large summer increases, Farrell said. And for those who can afford it, pure excitement reduces the cost of inflation.

“Travel is such an interesting barometer of consumer confidence,” said Farrell, en route to Chicago after a staff trip to Cancun. “We find that when consumers start to worry a bit, booking windows get shorter or people don’t book trips that far. … But travel may actually miss out on a lot of what’s happening in the economy because there’s such pent-up demand.

The Fed is ready to move forward with higher interest rates

Survey data released Monday by the New York Fed also showed that U.S. consumers expect future inflation levels to come down significantly. This is good news for Fed officials who will gather for their September policy meeting next week. Inflation expectations can be self-fulfilling and the Fed’s job becomes more difficult if households and businesses expect inflation to remain high and change their behavior accordingly.

The Fed raised rates at their most aggressive pace in decades and raised them by three-quarters of a percentage point in July. Fed watchers and financial markets are increasingly expecting another hike of this magnitude next week as the Fed races to get rates high enough to slow the economy.

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“[The Fed] said, “Look, we’re not where we need to be, but we’re not as far behind as we were,” said Diane Swonk, chief economist at KPMG.

Yet the Fed’s actions can only solve some problems in the economy. Russia’s invasion of Ukraine in February has already caused a massive spike in energy and gas prices this year, and more upheaval could come this winter.

“The rise in inflation may not prove to be sustainable if these geopolitical tensions escalate and Russia cuts off all oil supplies,” Brusuelas said. “So we’re ready for another round of supply shocks.”

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