Inflation slows, August US CPI to show, but not enough to appease worried Fed
By Jeffry Bartach
Consumer prices could drop in August for the first time since 2020 thanks to cheaper gas
The US inflation rate is on course to fall in August after falling from a 40-year high in July, but consumer prices are still rising too quickly to prevent another sharp rise in the benchmark interest rate of the Federal Reserve at its meeting later this month.
The consumer price index, the country’s main indicator of inflation, remained stable in July after a sharp drop in gasoline prices. The price of gas fell again in August and the CPI could actually turn negative for the first time since May 2020, shortly after the start of the pandemic.
Economists polled by The Wall Street Journal predict consumer prices fell 0.1% in August. The CPI is released on Tuesday morning.
If so, the annual inflation rate could slow to 7.9%, from 8.5% in July and 9.1% in June. The June reading was the highest since 1981.
Falling gasoline prices could also curb inflationary pressures in September and October. Crude oil prices have fallen and gasoline demand generally declines at the end of the summer driving season in the United States.
So the Federal Reserve should be ready to back down from plans to raise its benchmark short-term interest rate sharply at its policy meeting in late September, right? Not so, say economists.
Fed officials think inflation is starting to ease, but they worry that price pressures have broadened to a wider range of goods and services over the past year that encompasses most of the economy.
The cost of fuel, food, rent, housing, cars and trucks and many other goods and services have risen sharply – and there’s not much relief in sight.
A separate measure of consumer prices, known as the core CPI, underscores this point. The base rate, which excludes volatile food and energy prices, should rise another 0.3% in August.
As a result, the annual rise in the core inflation rate could actually rise from 5.9% in July to 6.1%. That’s more than triple the average annual inflation rate in the decade before the coronavirus pandemic.
The Fed sees core inflation as a better tool to determine the direction of inflation. And right now, Fed officials consider that price pressures are still far too high.
The question, then, is how much the Fed plans to raise its benchmark short-term rate when officials meet in Washington on September 20-21 to discuss their next move.
The rate helps determine the cost of borrowing for credit cards, mortgages, auto loans, and business loans. Higher rates slow down the economy and can even trigger recessions.
Wall Street thinks the central bank will raise the rate an additional 0.75 percentage points to a range of 3% to 3.25%. Just seven months ago, the rate was close to zero.
But a particularly weak CPI report could prompt the Fed to raise rates by just 1/2 a percentage point, some economists say.
The devil is in the details. If the cost of food and rent, for example, were to boil over in August, the Fed would have more reason to take it easy, they say.
Still, economists who believe a bigger rate hike is built into the cake point to the scorching labor market as reason enough for the Fed to remain aggressive in policy.
The United States created 315,000 new jobs in August, for example, and new jobless claims fell in early September to a three-and-a-half-month low.
The tightest labor market in decades is driving workers’ wages up at an annual rate of more than 5% – the fastest since the early 1980s. The Fed fears that rapidly rising wages will add to the inflation, making it more difficult to control prices.
“The labor market is still overheated and core inflation continues to rise at too high a pace,” said U.S. economist Alex Pelle of Mizuho Securities.
In the short term, even lower gas prices may not make the Fed’s job any easier. Americans will have more money to spend on other goods and services, which will keep the economy and job market growing faster than the Fed would like.
The Fed “needs to see growth slowing, not accelerating,” said chief economist Aneta Markowska of Jefferies LLC.
(END) Dow Jones Newswire
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