New inflation data released Tuesday showed price gains did not moderate as expected in August, unwelcome news for the Biden administration and the Federal Reserve, and a sign of the extent to which rapidly rising costs continue to plague. customers.
For Federal Reserve policymakers, who have raised interest rates to slow the economy and try to tame recent rapid inflation, the data is further evidence that price hikes have yet to show clear signs of getting back under control. , even as central bankers pay for a political campaign to slow the economy and crack down on inflationary pressures.
Prices rose 8.3 percent from the previous year, a rapid pace of increase for consumers and not as much of a slowdown as economists expected, even as gas prices fell and weighed on overall numbers. . At the same time, so-called core inflation accelerated again, particularly in August. This measure eliminates volatility in food and fuel prices to give a better idea of underlying trends and tracks products like clothing and furniture along with a range of services.
The central indicator rose 6.3% in the year to August, compared with 5.9% in July. That recovery happened in part because August price gains are measured against a relatively weak reading from the same month in 2021. When inflation is measured against a lower number from a year ago, or “base,” it tends to appear faster.
But the report’s details also offered signs that underlying inflationary pressures remain significant. While gasoline prices and the costs of used cars and trucks have started to decline, other prices are rising fast enough to fully compensate for those drops: Prices have risen 0.1% on a principal basis over the past month as prices per meals in restaurants, rentals and new vehicles withdrawn.
Such factors are likely to keep the Fed firmly in inflation fighting mode. Central bankers are waiting for a prolonged slowdown in price increases to convince them that their policies are working to cool demand and return the economy to a healthy environment where inflation is slow, steady and barely noticeable. Until that happens, officials have pledged to continue raising interest rates, moves that can slow down debt, limit consumer demand, and reduce hiring and wage growth.
“Inflation is too high and it is too early to tell whether inflation is moving significantly and persistently downward,” said Christopher Waller, a Fed governor, in a speech last week. “This is a struggle that we cannot and do not want to get away from.”
Officials are widely expected to raise interest rates by three quarters when they meet next week, which would be their third consecutive large move. Policy makers have been clear that they hope to slow the pace of rate movements eventually, but have said the timing will depend on incoming data.
Indeed, investors have begun to think about the possibility of an even greater rate hike in the wake of Tuesday’s data. Stock prices swooned as Wall Street digested the possibility that the Fed may need to be even more aggressive in limiting the economy to tackle an inflation problem worse than anything America has faced since the 1980s.
“Inflation remains hot, financial conditions have seen some improvement and labor markets are moving forward,” wrote Neil Dutta, head of the US economy at Renaissance Macro, in a research note following the data release on Tuesday. . “If the goal is to slow things down and create some pain, the Fed is failing by its own standards.”
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Equities tumbled and US government bond yields shot up after new inflation data undermined investors’ bets on the pace of slowing inflation in August.
The S&P 500 plunged more than 2% when trading opened on Tuesday. Shares have risen in recent trading sessions, climbing 1.1% on Monday and nearly 5% in the last week as investors increasingly bet on the Fed’s ability to lower inflation by raising interest rates without slowing the economy to the point of causing it to contract sharply.
But better-than-expected August inflation data was released Thursday by investors on the wrong foot, pushing shares lower and urging a quick repricing of how much the Fed may need to hike interest rates to curb the rise. of prices.
“We are not out of danger yet. We can’t even see the edge of the woods from here, ”said Luke Tilley, chief economist at the Wilmington Trust.
The two-year Treasury yield, sensitive to changes in the interest rate forecast path, jumped higher following the publication of the numbers, climbing to 3.74% and marking a new high for the year.
Solid labor market data earlier this month indicated the resilience of the economy after several rate hikes this year. Coupled with the persistent message from politicians that they have yet to complete their task of lowering inflation through higher rates, investors were already expecting another large, three-quarter percentage point rate hike when the Fed meets next week. . For a while, some had been betting on a half-point raise as the most likely option.
Following the inflation data, bets that the Fed would move aggressively when politicians meet next week have solidified, with some even starting to consider whether the central bank might raise interest rates. a full percentage point, which would be the largest rate hike since 1984.
Futures prices showing investors’ expectations of where interest rates will be at the end of the year have also risen, to nearly 4%, as investors bet on a further quarter-point hike from the Fed by December.
And the US dollar, which had weakened for four consecutive days against a basket of currencies representing America’s major trading partners, quickly strengthened.
Mike Pond, head of global inflation research at Barclays, said the surprising inflation data hasn’t altered his view that the Fed will raise rates by three-quarters of a point next week.
“But we think it will change the tone of what they do in the future,” he said. “This will leave the Fed more concerned.”
Higher-than-expected inflation in August was unwelcome news for President Biden, who sought to defuse Republican attacks on rising prices ahead of November’s mid-term elections.
Mr. Biden and his associates celebrated the drop in gasoline prices daily throughout the summer. They helped inflation moderate from its high point earlier this year, though not enough to offset the rise in prices for rents, food and others last month.
While he acknowledges the pain of rapid price increases across the economy, Biden said progress in the fight against inflation, including by signing a bill on energy, health care and taxes last month. what the Democrats called the Inflation Reduction Act.
But polls continue to show that inflation is hurting Biden and his party as Democrats try to keep control of the House and Senate. It looms as the main issue for voters in national opinion polls, and Americans say they trust Republicans more to manage inflation and the economy in general than Democrats.
There were signs of hope for administration officials, both among consumers and businesses. The National Federation of Independent Business reported Tuesday that its small business optimism index rose in August as inflation anxiety eased, continuing a rebound from its depths earlier this year. The Federal Reserve Bank of New York reported Monday that consumer inflation expectations are also falling.
Officials within the administration and the Federal Reserve say strong employment growth and consumer spending this summer silenced fears the country slipped into recession in the first half of the year.
The president sees these developments as signs that his policies are working to fuel the country in what remains a turbulent time in the global economy and is trying to claim credit.
Mr. Biden will hold a belated celebration to mark his signing of the inflation reduction law at the White House on Tuesday. Biden should blame Republicans for unanimously voting against the bill. On Wednesday, Mr. Biden will fly to the Detroit Auto Show to support his policies to increase production and low-carbon energy sources.
But the country’s economic reality remains more confused, as the inflation report pointed out. Food prices continue to rise, putting a strain on low-income families in particular. A possible rail strike could disrupt national supply chains. The global economy is slowing sharply and threats to the American recovery remain if European sanctions force millions of barrels of Russian oil to withdraw from the global market in the coming months.
More importantly – and perhaps more damaging to Biden and the Democrats – Americans’ wages have struggled to keep up with rapidly rising prices, an inconvenient truth for a president who has vowed to make real wage gains a centerpiece of his program. economic. Inflation-adjusted average hourly earnings increased across the economy in August, the Labor Department said Tuesday, but remain down nearly 3% from a year ago.
Republicans were quick to criticize Biden after Tuesday’s report. “Every day, Americans face Biden’s economic crisis,” said Missouri Rep Blaine Luetkemeyer, the top Republican on the small business committee. “Democratic inflation continues to drive up costs and leads more and more small businesses and families to question their future.”
Inflation in the US has cooled year-on-year in recent months due to falling gasoline prices, but economists are looking for more evidence that the slowdown in price hikes will become widespread and pronounced.
So far, this has yet to happen – and indeed important signs point in the opposite direction. Price increases in a range of products and services, from sofas to restaurant meals and rentals, continued to rise in August even as consumers received relief from the gas pump.
This is likely to leave politicians looking for clues that a larger decline could come. As they do, here are some positive developments, a couple of troubling ones, and a big, looming uncertainty that analysts will pay close attention to in the coming months.
Good News
Gas and other raw materials. The drop in prices at the gas pump has reduced annual inflation and the prices of some food commodities have also eased, which could eventually seep into retail prices. Read also : Europe Travel: Your Guide to Planning a Summer Trip. That would be good news for consumers, who tend to be sensitive to transportation and food costs. But for now, food costs continue to rise sharply as the spikes in commodity costs earlier this year continue to spread through the food aisles.
For Federal Reserve officials, the drop in gas and food prices would be a welcome development, but not a decisive one. As these costs go up and down, central bankers tend to look further when trying to get an idea of where inflation is headed.
Auto and other physical products. A more significant positive development is taking place in asset prices, some of which are showing the first signs of cooling. In particular, hikes in used car prices, which helped push inflation that started last year, are starting to slow, dropping 0.1% over the past month.
Commodity inflation may continue to subside as consumers are shifting their spending away from products they bought during the pandemic and back to services, such as restaurant dinners and vacations. And it could be helped by a resolution of supply chain problems, which have plagued manufacturers for more than a year but which have shown recent signs of slowing down, although they have not fully returned to normal.
Bad News
Labor market related services. Although prices go up for some goods, prices for services, including costs for eating out or hiring daycare, have risen rapidly. The cost of out-of-home food increased by an unusually fast 0. To see also : This Underestimated Real Estate Exchange is a Screaming Purchase Right Now.9% between July and August, for example. Large increases in these categories of services may be ready to continue, because their prices are closely linked to wages, which have increased in particular due to a strong labor market with low unemployment and shortages of workers affecting many sectors.
Rent. The most important category of services is represented by rental costs, which account for almost a third of total inflation and which continued to grow rapidly in August. For the time being, economists predict that housing costs will continue to rise sharply. There are too few apartments to go around, especially as renters avoid buying homes due to rising mortgage rates. And the sharp rise in rents over the past year is still slowly fueling inflation.
Uncertainties
Risk of war and disintegration. Economists have repeatedly predicted that inflation was about to decelerate only to shatter those expectations. On the same subject : Are video games really more expensive?. With the war in Ukraine still fueling uncertainty over supply chains and commodity markets, central bankers may be slow to declare victory over inflation. And even as price increases start to slow down, a key question is: by how much will inflation slow?
“The biggest question for the Fed isn’t: Has inflation peaked? It’s: what’s the destination? “Said Aneta Markowska, chief financial economist at Jeffries. She believes that without a noticeable slowdown in economic growth, it will be difficult to bring annual price gains below 4%. That would be much higher than average. annual rate of 2% that the Fed aims.
Food prices continued to rise in August, rising 0.8% from July and fueling a larger-than-expected rise in inflation last month.
Food prices in August increased by 11.4% compared to the same month a year ago. Food inflation in the United States has risen to its highest level in more than 40 years this year, driven by trends both in the United States and abroad. Farmers and grocers have had to pay higher prices for gasoline, workers’ wages and packaging, which they in turn have passed on to their consumers.
In August, food prices rose 0.7 percent, while restaurant meal prices rose faster, up 0.9 percent from the previous month. Cereals and baked goods increased by 1.2% compared to July. Meat, poultry, fish and eggs increased by 0.5%.
Among the foods with the biggest price increases last month were white bread, donuts, hot dogs, potatoes, tomatoes and canned fruit.
Over the past year, the cost of eating at home has grown by 13.5%, the sharpest increase since 1979. The cost of dining out has increased by 8% compared to August 2021.
A bird flu attack earlier this year left chickens and eggs scarce, driving up the prices of both. Drought in major agricultural regions, such as the western United States and Brazil, has pushed up the prices of foods such as grains and coffee, as has the Russian invasion of Ukraine, a major producer of wheat and sunflower oil.
More turmoil could be in store for global food markets. Last week, Russian President Vladimir V. Putin sowed new doubts about the future of the agreements that allowed the export of grains from Ukraine, driving up the price of wheat globally. On Thursday, India also banned exports of one type of rice and imposed a tax on the others in an effort to bolster supplies and fight domestic inflation.
The price of gasoline continues to fall steadily, easing pressure on American consumers as the cost of filling a tank continued to drop from record highs reached in the early summer.
Tuesday’s Consumer Price Index report showed gas prices fell 10.6% in August, which helped moderate inflation still skyrocketing.
The Energy Index, which tracks gasoline and electricity among other energy sources, fell 5% last month as electricity and natural gas prices rose.
After peaking at $ 5.02 in June, gasoline prices fell for 91 consecutive days and on Tuesday the national average stood at just over $ 3.70 per gallon, according to data from AAA. But analysts point to a few reasons why this series of declines is unlikely to continue.
Because they are driven by oil prices, gasoline prices are also subject to a wide range of challenges, such as hurricanes that knock out drilling in the Gulf of Mexico and efforts to punish Russia for its invasion of Ukraine. limiting its ability to sell crude to the global market.
While gas prices are down, the overall energy index still remains up 23.8% in the 12 months ended August. Electricity prices alone rose 15.8%, representing the largest increase in 12 months since August 1981, the inflation report says. The jump in electricity prices is largely attributable to the high cost of natural gas, said Laura Rosner-Warburton, economist at MacroPolicy Perspectives.
As winter approaches, other fuel prices could affect inflation data. The cost of heating a home with natural gas, the most common source of home heating fuel in the United States, is projected to increase by more than 25% from last year, to $ 952 for the six months of October to March. , according to the National Association of Energy Assistance Directors.
“A harsh winter would be expected to create a significant increase in demand in the price of natural gas,” said Bryan Benoit, US National Energy Management Partner at Grant Thornton. “And then, of course, all of this is further exacerbated by what is happening with the war in Ukraine.”
One reason to worry that inflation won’t fall anytime soon: rapidly rising rents.
The Department of Labor’s rent measure increased 6.7% in August from the previous year, the fastest rate since the mid-1980s. And the increases are accelerating: over the past three months, rents have risen by 2.2 percent, the equivalent of an annual rate of 9.2.
These figures may seem low to anyone who has recently signed a new lease, as tenants in many cities are facing double-digit percentage increases. This is partly because the Department of Labor measure seeks to capture the rate at which rents are rising for everyone, not just people signing new leases.
This approach means that the rental price index usually moves slowly, but once it starts moving, it tends to continue. And because housing is such an important component of total spending, if rents continue to rise rapidly, it will be difficult for the Fed to bring headline inflation back to its 2% target.
The acceleration in rents reflects a broader shift in inflationary dynamics in recent months. When prices began to rise rapidly last year, the problem focused in the goods sector, reflecting supply chain disruptions that made it difficult for automakers and other manufacturers to meet the strong demand. More recently, asset inflation has started to decline, but that decline has been offset, at least in part, by faster inflation in services, including housing.
Numbers from private data sources have shown some moderation in the prices landlords are asking for available apartments in recent months, which should eventually filter through the government’s rental index. But there are also forces that push in the opposite direction. Higher interest rates are making it more difficult for people to buy homes, which is driving up the demand for rental units and keeping prices high. Rents also tend to track wages, which have continued to rise as the labor market has remained strong.
What is the CPI for June 2022?
Consumer prices rose 9.1% from the year ending June 2022, the largest increase in 40 years: The Economics Daily: US Bureau of Labor Statistics. The . gov means it is official. Federal government websites often end with.
What is the estimated CPI for July 2022? The consumer price index for all urban consumers remained unchanged in July 2022 (seasonally adjusted) after rising by 1.3% in June and by 1.0% in May. Gasoline prices fell 7.7% in July and offset the rise in food and accommodation prices, resulting in the index for all items remaining unchanged in July.
What is CPI right now?
Non-seasonally adjusted CPI measures The consumer price index for all urban consumers (CPI-U) has increased by 8.5% over the past 12 months to an index level of 296.276 (1982-84 = 100). For the month, the index remained unchanged before the seasonal adjustment.
What is the current CPI rate for 2022?
The consumer price index rose 8.5% for the year ended March 2022, following a 7.9% increase from February 2021 to February 2022.
What is the predicted UK CPI for 2022?
OOH’s contribution to the CPIH annual inflation rate increased to 0.60 from 0.56 percentage points between June and July 2022, increasing the annual rate by 0.04 percentage points. This is the result of the 0.3% cost increase in July 2022 compared to a lesser 0.1% increase a year earlier.
How much does CPI increase each year?
In July, the consumer price index for all urban consumers remained unchanged, seasonally adjusted and increased by 8.5% in the last 12 months, without season adjustment. The index for all items minus food and energy rose 0.3 percent in July (SA); up 5.9 percent over the year (NSA).
What is the increase in CPI from 2021 to 2022? The consumer price index increased by 8.5% for the year ended March 2022, following a 7.9% increase from February 2021 to February 2022. The increase of 8.5% in March was the largest 12-month advance since December 1981. Line chart with 507 data points.
What is the CPI for each year?
| Year | Average annual CPI (-U) | Annual percentage change (inflation rate) |
|---|---|---|
| 2017 | 245.1 | 2.1% |
| 2018 | 251.1 | 2.4% |
| 2019 | 255.7 | 1.8% |
| 2020 | 258.8 | 1.2% |
What is the growth rate of CPI?
Non-seasonally adjusted CPI measures The consumer price index for all urban consumers (CPI-U) has increased by 8.3 percent over the past 12 months to an index level of 296.171 (1982-84 = 100). For the month, the index remained unchanged before the seasonal adjustment.
Who benefits from inflation?
1. Anyone with a fixed salary or a fixed income.
Who is hurt and who benefits from inflation? Lenders are hit with unexpected inflation because the money that is returned has less purchasing power than the money they lent. Borrowers benefit from unexpected inflation because the money they return is worth less than the money they borrowed.
Who get benefited from inflation?
People who have to pay off their large debts will benefit from inflation. People who have fixed wages and cash savings will be hurt by inflation. Inflation is a situation where money will be able to buy fewer goods than it was able to when the value of money falls.
Who gains from inflation?
An important redistribution of income and wealth that occurs during unexpected inflation is the redistribution between debtors and creditors. a. Debtors profit from inflation because they pay back creditors with dollars that are worth less in terms of purchasing power.
