With Tuesday’s announcement that consumer price inflation had been higher than expected in August, the recent spate of positive economic news for Joe Biden and the Democrats came to an end. The main inflation rate fell from 8.5% in July to 8.3% last month, according to the latest Labor Department report, but the base rate, which excludes volatility in energy prices and groceries, it increased from 5.9% to 6.3% as rental costs, new cars and other items rose in what the report called a “large” increase. Economists and the Federal Reserve monitor the benchmark rate closely, as they believe it provides an accurate picture of underlying trends. The central question now is whether Fed Chairman Jerome Powell and his colleagues will raise interest rates more aggressively to moderate inflation, a step that could inadvertently plunge the economy into a recession.
The inflation report triggered a massive sell-off on Wall Street: Stocks suffered the biggest drop in more than two years. However, despite renewed criticism of the Biden administration by Republican leaders, the report on the consumer price index (CPI) needs to be put into perspective. Despite some troubling features, it confirmed that general inflationary pressures are gradually easing, albeit not as quickly as many consumers would like to see. In June, the nominal rate was 9.1 percent, so in two months it fell by 0.8 percentage points. And, even though the core rate has increased, there are reasons to believe that it will drop considerably in the coming months. “Big picture, the core CPI rate is still slowly falling,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, told me. “I have no doubt that it will drop significantly over the next six months.”
As Biden quickly pointed out, gas prices dropped dramatically over the summer. Where prices start from depends on what happens in the global oil market, which is difficult to predict. But on Tuesday, the price of crude oil fell again and, if this continues, the prices at the pump will continue to fall. How far away? “Excluding hurricanes or unforeseen disruptions. . . the national average could drop to $ 3.49, so $ 3.25, “Patrick De Haan, an oil analyst at GasBuddy, a technology company that helps people find cheap gas, told Yahoo Finance.” impossible that we could be on the way to a national average of $ 2.99 by the end of the year. “
Cheaper gas is good news for motorists, of course, but it also bodes well for food buyers, which means pretty much everyone. In the past twelve months, according to the August report, the cost of food consumed in or out of the home has increased by 11.4%, the largest annual increase since May 1979. One of the things that has pushed food prices to the upside was sharply higher transportation costs. With fuel prices lower, these costs are now falling, which should eventually lead to lower food prices. If it doesn’t, someone somewhere is taking advantage. The same goes for airfares, which fell 4.6% last month. With the cost of jet fuel declining dramatically over the summer, fares for the fall are expected to drop further.
Then there is the global supply chain crisis, which is finally beginning to ease. This is particularly evident in the automotive industry. Over the past two years there has been a severe shortage of new vehicles, which has led to significant increases in used car prices. More recently, however, auction prices for used cars fell sharply, by 4% in August alone, according to an industry index. So far, those lower auction prices haven’t led to a big drop in the prices auto dealers charge for used vehicles. This should happen soon. And as used cars become significantly cheaper, this should limit dealers’ ability to raise the prices of new ones. With vehicles accounting for around 11% of the CPI, these developments are far from trivial.
Another factor to consider is the role that rents, which make up nearly a third of CPI, that is a huge part of it, play in keeping inflation high. Over the past twelve months, according to the August report, rents for primary residences have risen by 6.7 percent. (This figure includes rents paid by people on long-term leases, so it accounts for the much larger increases for new leases seen in some places, such as parts of New York City.)
The higher rents reflect multiple factors, including strong demand, a shortage of available rents, and rising property prices, which have priced some potential buyers and turned them into renters. As the Fed recently raised the federal funds rate, mortgage rates have also risen sharply. As a result, home sales have slowed and prices are now falling in many parts of the country. If they continue to decline, and they probably will, buying will become a more attractive option, which will reduce the demand for rents. This, in turn, should put downward pressure on rents. Unfortunately, this may take some time. “Although we expect the pressures on housing costs to ease in the coming months in the wake of a sharp decline in housing demand, the drop in prices will not be evident for a few more months,” Gregory Daco, chief economist at EY-Parthenon, wrote in a comment on the inflation report.
Based on these and other factors, including a squeeze in profit margins as pandemic-related supply restrictions continue to ease, Shepherdson predicts that core inflation will have fallen from 6.3 to 4 by March next year. 8%. He also cited Wednesday’s release of the Producer Price Index for August, a separate report, which showed wholesale prices declined slightly over the month and rose 8.7% year-on-year. smallest increase in a year. “It showed unequivocally declining inflation in both the goods and services sectors,” she noted.
In their eagerness to shift midterm focus from Donald Trump and the right to abortion to inflation and the cost of living, Republicans are obviously skating on any encouraging economic development. The danger is that with only one monthly inflation report left before voting day – it will be released on October 13 – their messages could ring out. Although Biden’s approval ratings have rebounded slightly in recent weeks, a new Harvard HOODS-Harris Poll indicates that 54% of Americans still believe their personal finances are deteriorating. (46% of respondents said their situation was improving or unchanged.)
With prices still rising faster than wages, these survey results aren’t surprising. But with the overall rate of inflation falling and with wage pressures and inflation expectations contained, there is still reason for optimism and no justification for the Fed’s panic. When Powell and his colleagues meet next week, the head of the Fed should make this clear and resist calls for more drastic interest rate hikes. Reducing inflation will take some time, but the process is already underway.