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Fresh signs of stubbornly high inflation in all corners of the world’s largest economy are fueling concerns that many economists expect a pullback in consumer price gains later this year to be bumpier than expected.
Data released Wednesday by the U.S. Bureau of Labor Statistics showed that annual inflation, as measured by the Consumer Price Index, accelerated to 3.7% in August as gasoline prices rose.
While “core” inflation, which excludes volatile items such as food and energy, recorded its lowest annualized rate in nearly two years in August, the monthly increase was also higher than expected, at 0.3%.
The August data left economists and Fed officials with a lingering question: Were the months of slowing price gains earlier this summer just a blip?
Economist Pooja Sriram said: “This report does illustrate the fact that the deflation that the consumer price index (CPI) data showed before (August) may be moving at a more gradual and inconsistent pace than people thought. So long-term pace.” Barclays.
Referring to the Fed’s goals, she added: “We are still some way off from sustainably achieving our 2 percent inflation target.”
Fed policymakers have raised their benchmark interest rate by more than 5 percentage points since March 2022, and they are preparing to hold the federal funds rate steady at a 22-year high of 5.25% to 5.5% at next week’s meeting while still keeping rates constant. Extra growth this year.
But she said a concerning issue in the August data was rising prices for items such as household goods and new cars. These prices have been slowing. If the trend continues or affects other commodities, it could undermine one of the assumptions behind economists’ papers on deflation this year.
Another source of anxiety in the August data stems from “core inflation excluding housing” – a closely watched measure of underlying inflation that measures core prices after excluding energy, food and housing-related costs. Last year, Fed Chairman Jay Powell said the measure was “probably the most important category for understanding the future evolution of core inflation” given that it reflects changes in the labor market as a whole.
“Risks do appear to be tilted to the upside,” Sriram said, adding that tight labor markets and continued strength in consumer spending will continue to put pressure on prices across the economy.
Sriram’s team expects the Fed to raise interest rates by another 25 basis points in November. Thereafter, the annual core CPI rate is expected to hover at 3.6% through the end of the year before falling to 2.8% in December 2024.
But Alan Detmeister, a former Fed economist now at UBS, said the core inflation rate excluding housing comes with some caveats, namely that it sometimes reflects travel-related costs disproportionately , such as air tickets and transportation services. It is also often the “final mover” in showing price deceleration. This suggests that only a few areas of the economy pushed up inflation in August.
That, coupled with many signs that the labor market is cooling, makes Detmeister optimistic that inflation will remain moderate, albeit with “considerable volatility” in the coming months.
Economists say that volatility will make the Fed nervous as it charts the final stages of a historic monetary tightening campaign while weighing the risk of squeezing the economy too much.
In practice, that could mean Fed officials signal a quarter-percentage point hike when they release another so-called “dot plot” of personal forecasts after next week’s rate decision.
Detmeister is one of the economists betting that the Fed won’t raise interest rates again – a view that’s also reflected in futures markets. Others, however, believe the central bank is not done yet.
Jason Furman, a Harvard professor who served as an economic adviser in the Barack Obama administration, said another rate hike in December or early next year is possible, especially if inflation data doesn’t start to improve. .
“It’s not as bad as it looked a year ago, but it’s probably not as good as it looked in June and July,” he said. “If we have another two months like August, that’s going to be a real problem for the Fed.”
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