Consumer price index report: US inflation fell in August 2022

Significantly lower gas prices and cheaper used cars curbed inflation, but many other items rose in price.

WASHINGTON – Lower gas costs slowed US inflation for the second straight month in August, but most other prices across the economy continued to rise – evidence that inflation remains a heavy burden on American households.

Consumer prices rose 8.3% year-on-year last month, the government said on Tuesday, after jumping 8.5% in July and hitting a four-decade high of 9.1% in June. On a monthly basis, prices rose 0.1% after remaining flat in July.

But excluding the volatile grocery and energy categories, so-called core prices rose 0.6% in July-August — a sharp rise from 0.3% in the previous month and crushing hopes that core prices would soften for now. And in the year that ended in August, core prices rose 6.3%, up from 5.9% in July. Rent, medical care and new cars have all become more expensive in the past month.

Core prices tend to give a clearer indication of where costs are going than headline inflation. Stock prices fell and bond yields rose on worse-than-expected core numbers, with many investors concerned that the Federal Reserve could become even more aggressive in its bid to contain inflation. The Dow Jones industrial average fell more than 800 points in early trade.

Further rate hikes by the Fed could weaken growth enough to push the economy into recession. Some economists now expect the Fed to raise its short-term benchmark interest rate, which currently ranges from 2.25% to 2.5%, to 4.5% or higher. That would make it even harder for the central bank to achieve its goal of a “soft landing,” where it reins in inflation without triggering a recession.

“That was a disappointing report,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “It increases the risk of higher interest rates and a hard landing for the economy.”

Chairman Jerome Powell is expected to announce another large hike in the Fed’s interest rate next week, which will result in higher costs for many consumer and business loans.

Inflation is higher than many Americans have ever experienced, driving up family grocery bills, rent and utilities, among other expenses. Despite strong job growth and low unemployment, the gloom over the economy has deepened.

Food prices continue to rise rapidly, rising 0.7% from July to August. Over the past year, they’ve risen 13.5% — the largest 12-month increase since 1979.

Chicken prices have increased by nearly 17% over the past year. And egg prices rose 2.9% in August from July and are nearly 40% higher than a year ago.

Republicans have tried to make inflation a key issue in the congressional elections. They blame much of the surge on President Joe Biden’s $1.9 trillion stimulus package passed last year. Many economists generally agree, though they say that intricate supply chains, Russia’s invasion of Ukraine and widespread shortages of items like semiconductors were also key factors behind the inflation spike.

At the same time, the fall in gasoline prices – perhaps the most visible barometer of inflation for consumers – could improve the Democrats’ midterm election prospects. It may have already contributed to slightly higher public approval ratings for Biden.

Biden has generally stopped referring to the impact of inflation on family budgets in his speeches. He has instead highlighted his government’s recent legislative achievements, including a law enacted last month aimed at reducing drug prices and tackling climate change.

Nationally, the average cost of a gallon of gasoline has fallen to $3.71, down from just over $5 in mid-June.

But the prices of many other commodities are still rising even as supply chains unravel, Rosner-Warburton pointed out. Furniture, carpets and new cars have all become more expensive over the past month, suggesting that companies are still raising prices amid strong consumer demand.

“Companies are still pushing big price increases on these commodities, and that’s problematic,” she said. That means the Fed will likely have to work harder to stifle consumer spending through higher interest rates.

Elaine Buckberg, chief economist at General Motors, said the pandemic disruptions to overseas semiconductor production that have been slowing auto production have dissipated significantly and disruptions across the supply chain have improved about 80% from the worst days of the pandemic.

Still, Americans are still desperate for cars, Buckberg said, which has allowed dealerships to keep their markups much higher than they were before the pandemic.

“Virtually every vehicle that comes to a dealership has already been sold to someone,” she said.

Ongoing increases in the price of raw materials – and labor – have left many small businesses in trouble. Some raise their own prices to keep up, only to lose customers, according to a Goldman Sachs survey of 10,000 Small Business Voices.

Meaghan Thomas, co-owner of Pinch Spice Market in Louisville, Kentucky, an online spice seller, has avoided raising prices for the past two years but fears it may not last if inflation worsens.

The price of shipping spices from overseas has quadrupled, she said, and she’s seen little relief so far, despite reports that those costs are falling. The cost of spices, which she and her partner grind and blend at a small factory, has increased by as much as 25% over the past year. They plan to expand the factory but have found that the cost of wood, metal doors and other materials is higher than expected.

The company’s profit margin has been halved, Thomas said, but she and her partner think it’s important to keep their products affordable. She says larger companies have exacerbated inflation by raising prices unnecessarily.

“We can hold out for a bit longer if all these other companies stop raising their prices,” Thomas said.

Next week, most Fed watchers expect the central bank to announce a third straight quarter-point hike to a 3%-3.25% range. The Fed’s rapid rate hikes — the fastest since the early 1980s — typically result in higher mortgage, auto and business loan costs in an effort to slow growth and lower inflation.

According to mortgage buyer Freddie Mac, the average 30-year mortgage rate rose to nearly 5.9% last week, the highest in nearly 14 years.

Powell said the Fed will need to see several months of low inflation readings suggesting rate hikes are falling back toward its 2% target before it could suspend rate hikes.

Wages are still rising sharply – ahead of the inflation adjustment – which has increased demand for housing as more people move out on their own. A shortage of available homes has also forced more people to keep renting, increasing competition for apartments.

Rising rents and more expensive services like medical care are also keeping inflation high. Consumer price index report: US inflation fell in August 2022

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