HomeBusinessInflation nudged up again in August, as gas prices rose rapidly

Inflation nudged up again in August, as gas prices rose rapidly

High gas and housing costs pushed inflation higher in August, muddling the Federal Reserve’s ongoing fight to slow the economy and tame consumer prices.

The inflation report released Wednesday came in a bit hotter than expected but didn’t pose major surprises. It will test the Fed’s resolve to be patient, as policymakers collect data over time and debate whether to raise interest rates again later this year. Officials have long said the path to stabilizing the economy will be bumpy. The August report, whether it is a one-off or a sign of a more durable problem, made that clear.

Data from the Bureau of Labor Statistics showed prices climbed 3.7 percent in August compared with the year before, and 0.6 percent compared with the previous month — slightly higher than economists’ forecast. That marks the second-straight bump in the annual inflation rate.

The report is the last major piece of economic news that officials at the Fed will study before convening for their September policy meeting next week. Central bankers have set the expectation that they won’t raise rates, so they can take more time to see how their moves until now are shaping the economy. Experts say the Fed is unlikely to change course because of the August data. But the door is open for another hike later this year, and next week’s meeting will illuminate how officials think their inflation fight will unfold.

“It’s a little hot, but I don’t think it’s an inflection point,” said Skanda Amarnath, executive director of Employ America, a liberal think tank pushing for the economy to run hot. “It’s information that tells you the process is going to take some time. Don’t expect inflation to fall overnight.”

Gas costs drove inflation in August, rising 10.6 percent over the month and accounting for more than half of the increase over July. All other major energy categories rose as well.

The shelter index, which is largely made up of rent costs, rose for the 40th consecutive month. Rent rose 0.5 percent in August, slightly hotter than the 0.4 percent notched in July.

There were a few exceptions: Costs for used cars and trucks eased 1.2 percent last month. But the scant signs of progress were dwarfed by other measures. Food costs rose 0.2 in August, the same rate as July. Prices for car insurance rose 2.4 percent, and medical care rose 0.2 percent after falling in July. Airfares also reversed course, climbing 4.9 percent after multiple months of cooling prices.

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Economists had expected the uptick because of rising gas, housing and food costs — factors that aren’t much of a surprise. Plus, prices from August are being compared with last year, when inflation was high but slowly ticking down. That means that “base effects,” as they’re known, matter — if price increases were falling a year ago, they can look like they’re rising more now in comparison.

Much attention goes to the overall, annual inflation figure. But policymakers are especially mindful of a measure known as “core inflation,” which strips out volatile categories like food and energy that can bounce around a lot month to month. There, too, inflation came in a bit hotter than expected, rising 0.3 percent in August, after a 0.2 percent increase in July.

Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, said that’s cause for concern. It’s too soon to tell if August is a one-off. But if monthly price increases continue on that path, then the Fed’s ability to stomp out inflation gets even harder, Strain said. (The Fed’s preferred inflation gauge is different from the one released Wednesday, but the two measures tell similar stories.)

“In a 0.2 percent world, the risks are about how long does it take to get back to target, and is that a threat to the Fed’s credibility,” Strain said. “In a world of 0.3 percent monthly increases, the risk becomes, ‘Will we ever get back to target.’ That’s a very different risk.”

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Yet there’s been notable progress since summer 2022, when the consumer price index peaked at 9.1 percent. Policymakers are growing more optimistic that the economy can cool down without tipping into a recession. But threatening the path is the thorny reality that the remaining, persistent sources of inflation will be tricky to stamp out.

“There are unique supply problems going on, globally, and the Fed can’t do anything about it,” said Joe Brusuelas, chief economist at RSM. “The Fed will have to look right through the volatility.”

Inflation has come down for multiple reasons over the past year. Supply chains have cleared their backlogs, making it easier for consumers to get everything from computers to couches. The energy price surge that followed Russia’s February 2022 invasion of Ukraine has abated. And the Federal Reserve has managed to get borrowing costs high enough to where they meaningfully slow the economy, especially in interest-rate-sensitive sectors like housing.

Fed chief says more ‘ground to cover’ to get inflation under control

But that doesn’t mean prices themselves have returned to pre-pandemic levels, which experts say is a main reason many Americans feel so down on the economy. That’s especially the case because some of the remaining sources of inflation affect key staples — like food and rent — that continue to dog the budgets of families and businesses nationwide.

Rent, meanwhile, continues to be a major driver of overall inflation. There are clear signs that rent costs are easing from their pandemic highs, and the hope is that prices will keep cooling as roughly 1 million multifamily rental units come on line later this year and next. But it will take time for that new supply to filter through the entire market, and any effect is unlikely to show up in official inflation reports for at least a few more months.

Through it all, the economy continues to show remarkable strength. The labor market is still growing but at more sustainable levels, and the unemployment rate is at a tight 3.8 percent. Crucially, consumers are still spending — on new cars and concert tickets alike — keeping the economy and job market churning. Put together, that has economists growing more optimistic that there won’t be a recession. Goldman Sachs last week cut the chances of a downturn to 15 percent over the next 12 months, from a previous forecast of 20 percent.

Employers added 187,000 jobs in August, showing resilience but slower growth

The latest inflation data comes as the Fed is debating how much higher to raise interest rates and how long to keep pressure on the economy. After scrambling to hoist borrowing costs over the past 18 months, policymakers are in a new phase. Their message now is that they can afford to be patient and take stock of incoming information on prices, jobs, wages, consumer spending and economic growth.

For now, markets largely expect the Fed will hold rates steady when it convenes later this month. That would keep the Fed’s benchmark interest rate, known as the federal funds rate, at a level between 5.25 and 5.5 percent.

All three major stock indexes were muted on the report, and were still flat around midday Wednesday.

During a closely watched speech last month, Fed Chair Jerome H. Powell made clear there is more ground to cover to fight inflation.

“We will need price stability to achieve a sustained period of strong labor market conditions that benefit all,” Powell said. “We will keep at it until the job is done.”

In Sacramento, Shay Aziz feels the sting of high gas and rent prices at her company, Valley Courier Xpress. Her pricing for deliveries takes all sorts of things into account, like weight, driver pay and the kind of vehicle used to complete a trip. But gas costs and the pressure she feels to keep wages high enough to retain her small team of drivers make it hard to see a way around raising prices.

She and her husband have thought about growing the company to the Bay Area, but rent and financing costs would be too expensive. For now, Aziz said, that means figuring out the right timing for raising prices and holding firm when customers call for an estimate “and always comment, ‘Really?’”

“They don’t understand, because they’re thinking about how much they can afford. Not about me and how much I know about my business,” Aziz said. “They say, ‘Can you go to San Francisco for $100?’ That’s not even going to cover the gas.”

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