Data released Tuesday by the Bureau of Labor Statistics showed August prices rose 8.3% from the previous year. It is down from 8.5% in July and 9.1% in June, but still higher than expected given the steep drop in gasoline prices in recent weeks.
American politicians, economists and the public are eager for consistent signals that inflation has peaked this summer after climbing to its highest level in 40 years.
The monthly report released on Tuesday, known as the Consumer Price Index, didn’t offer much reassurance. The food index has risen 11.4% in the past year, the largest increase in 12 months since May 1979. Food prices have risen 0.8% in the last month alone. Costs for housing, medical care, new cars and home furnishings are all up from the previous month.
There were some exceptions. The gasoline index fell 10.6% as pump prices fell from summer highs. Costs for airline tickets and even used cars have dropped.
Inflation is the economy’s biggest problem, and its toll is heavier on vulnerable families with little room to absorb the higher costs of rent, groceries and everything in between.
The Federal Reserve has been fighting inflation by raising interest rates, which are designed to slow the economy by making all types of investments and loans more expensive – from mortgages to car loans to hiring. The Fed’s goal is to use higher rates to dampen demand in the economy, especially since its tools can do nothing to solve problems such as supply chain jams, labor shortages or the war in Ukraine.
“There’s a bigger story than just ‘falling price’,” said Joe Brusuelas, chief economist at RSM. “That’s the question, and that’s the subject of politics right there.”
Americans are finally feeling better about the economy
But the fight against inflation has serious consequences and could eventually shake the economy as well forcefully, unleashing a recession and a new wave of job losses. However, the Fed has sent a clear message: it is pressing.
“While higher interest rates, slower growth and weaker labor market conditions will reduce inflation, they will also bring some pain to households and businesses,” Fed Chairman Jerome H. Powell said in a statement. carefully observed speech last month. “These are the unfortunate costs of reducing inflation. But failure to restore price stability would mean much greater pain. “
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Inflation also plays a political role, influencing the mid-term elections. The Biden administration has been hammered by Republicans over the sprawling stimulus efforts of the onset of the pandemic that helped boost the economy. And this summer, rising gas prices in May and June soured Americans’ sentiments about the economy even further, plunging consumer sentiment and crashing President Biden’s poll numbers. But gas prices are constantly falling. After surpassing $ 5 in June, the national average for a gallon of gas was $ 3.70 on Tuesday, according to AAA.
Republicans have tried to frame their political message around inflation as they vie for control of the House and Senate. However, inflation has lost some strength among voters lately, especially as gas prices have steadily fallen from summer highs and the job market is still buzzing.
Indeed, Americans are starting to feel better about the economy and consumer sentiment, which plummeted in June, has grown. Lynn Farrell, president and owner of Chicago-based Windy City Travel, said business is booming, especially in luxury travel. People want to fly first class after long delayed vacations. Farrell will put together safari packages for customers looking for even more extravagant travel.
Airfares have dropped since their summer waves, Farrell said. And for those who can afford it, the sheer excitement is cutting the toll of inflation.
“Travel is such an interesting barometer on consumer confidence,” said Farrell, on his way to Chicago from a staff trip to Cancún. “We see that when consumers start getting a little anxious, booking windows get shorter or people don’t book trips that far away. … But travel could actually escape a lot of what’s happening in the economy because there is pent-up demand. “
The Fed is poised to move forward with higher interest rates
Survey data released Monday by the New York Fed also showed that American consumers expect a significant drop in future inflation levels. This is good news for Fed officials who will gather for the September policy meeting next week. Inflation expectations can self-fulfill and the Fed’s job becomes more difficult if households and businesses predict that inflation will remain high and change their behavior accordingly.
The Fed raised rates at the most aggressive pace in decades and hiked them by a whopping three-quarters of a percentage point in July. Fed watchers and financial markets increasingly expect another hike of this magnitude next week as the Fed is rushing to get rates high enough to slow the economy.
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“[The Fed] said, ‘Listen, we’re not where we need to be, but at least we’re not as far behind as we were,’ ”said Diane Swonk, chief economist at KPMG.
However, the Fed’s moves can address only a few problems in the economy. The Russian invasion of Ukraine in February has already caused a massive increase in energy and gas prices this year, and White House officials are alarmed by a looming energy crisis in Europe following threats from Russian President Vladimir Putin. to force a harsh winter on the continent.
“The progress of inflation may not prove sustainable if those geopolitical tensions intensify and Russia cuts off all oil supplies,” said Brusuelas. “Then we are ready for another series of offer shocks.”