US inflation roars back in August, CPI shows, despite falling gas prices

The numbers: Falling gas prices delivered a second straight low US inflation reading as the consumer price index rose just 0.1% in August. But the report also showed that inflation has spread more broadly through the economy and will spur the Federal Reserve to raise interest rates sharply again.

Economists polled by The Wall Street Journal had predicted a 0.1% drop in CPI. The small increase last month lowered the annual inflation rate to 8.3% from 8.5% in July and a 41-year high of 9.1% in June.

But in a more worrying sign, the so-called core inflation rate, which excludes food and energy prices, rose a sharp 0.6%, doubling the previous month’s rise. Wall Street had predicted an increase of 0.3 percent.

The Fed sees the core interest rate as a more accurate measure of future inflation trends.

The rise in the prime rate over the past year escalated to 6.3% from 5.9%, underscoring how much inflation has become embedded in the economy. The cost of staples such as food, rent, medical care, furniture and new cars all rose last month.

In contrast, inflation rose on average by less than 2% per year in the decade prior to the pandemic.

Large image: The Fed is expected to raise interest rates until the end of 2022 to try to extinguish the worst inflation fire in four decades, but it has a long way to go to return to pre-pandemic levels.

However, the central bank risks an American recession if it goes too far. Higher interest rates reduce inflation by increasing borrowing costs for consumers and businesses, thus slowing the economy.

The central bank is ready for another increased interest rate increase at its next meeting on 20-21. September in Washington. The disappointing CPI report suggests another three-quarters of a percentage point increase is in the works.

Key details: The tepid headline CPI readings in August and July are mostly due to falling gasoline prices. The government said gasoline prices fell 10.6% last month.

The average US price for a gallon of gas, which topped $5 for the first time ever in June, fell to $3.83 in late August.

It has since fallen to $3.69 in September, the Energy Information Administration reported, suggesting another low in headline inflation in the next CPI report.

However, the rest of the August report was filled with warnings about inflation.

Spending on groceries rose again last month, rising 13.5% in the past year – the biggest increase since 1979.

Rents rose 0.7% in August, as did housing. The Fed is particularly concerned about rising rents, as it is one of the biggest contributors to inflation and shows little sign of reversing.

Rents have risen 6.3% in the past year to mark the biggest gain since 1990.

More bad news: Medical care is getting more expensive again after prices leveled off during the pandemic. The cost of care has increased by 5.4% in the past year, the largest increase since 1993.

Prices also rose last month for almost everything else, with the exception of airline fares and used vehicles.

The only good news: Inflation-adjusted wages rose 0.2% in August to mark the second straight increase. However, the real wage has fallen by 2.8% in the past year.

Look forward to: “Underlying inflationary pressures remained intense in the August CPI report, virtually guaranteeing another excessive Fed rate hike next week,” said senior economist Sal Guatieri of BMO Capital Markets.

Market reaction: US stocks opened sharply lower on Tuesday as investors reacted to stronger-than-expected inflation. Dow Jones Industrial Average DJIA,
-2.24%
fell more than 700 points, while the S&P 500 SPX,
-2.56%
also sank.

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