Inflation persists as prices rose further in August compared to July

Inflation persists as prices rose further in August compared to July

Consumer prices in August climbed 0.1 percent from the previous month, despite lower gas and energy costs. A number of economists had hoped Tuesday’s release would show inflation finally slowing, but a new government report shows price increases remain stubbornly high.

Data released Tuesday by the Bureau of Labor Statistics showed August prices were up 8.3% from a year earlier. This is down from the 8.5% recorded in July and the 9.1% recorded in June. And while those measures are dangerously above normal levels, policymakers, economists and the American public are eager to see consistent signs that inflation peaked this summer after hitting a 40-year high. .

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

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.

“There’s a bigger story than just ‘falling prices,'” said Joe Brusuelas, chief economist at RSM. “That’s the demand, and that’s what the policy is about.”

Americans are finally feeling better about the economy

But 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 prices at the pump are steadily falling. After topping $5 in June, the national average for a gallon of gasoline was $3.70 on Tuesday, according to AAA.

Republicans have sought to frame their 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 rise in energy and gas prices this year, and White House officials are alarmed by a looming energy crisis in Europe after the Russian President Vladimir Putin’s threats to force a dark winter on the continent.

“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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