Inflation: CPI fell in August as gas prices fall

Inflation is expected to have slowed again last month thanks to falling prices for gasoline, food and used cars, a new government report is expected to show on Tuesday, though it could be a long time before that. return prices to pre-pandemic levels for families and businesses

Data to be released by the Bureau of Labor Statistics could show August prices rose about 8 percent from a year earlier. That would be less than the 8.5 percent noted in Julyand 9.1 percent of June. And while those measures are dangerously above normal levels, lawmakers, economists and the American public are eager for consistent signs that inflation peaked this summer after hitting the highest level in 40 years.

Inflation is the biggest problem in the economy, and its price falls more difficult in vulnerable families with little room to absorb higher costs for rent, groceries and everything else.

The Federal Reserve has been fighting inflation by raising interest rates, which are designed to slow the economy by making all kinds of investments and loans more expensive, from mortgages to car loans to rents. The Fed’s goal is to use higher rates to curb demand in the economy, especially since its tools can do nothing to fix problems like supply chain bottlenecks, worker shortages, or the war in Ukraine.

“There’s a bigger story than just ‘price crashes,'” said Joe Brusuelas, chief economist at RSM. “That is the demand, and that is the object of the policy right there.”

Americans finally feel better about the economy

But the fight against inflation brings serious consequences and could eventually shake the economy as well strongly, provoking a recession and a new wave of job losses. Still, the Fed has sent a clear message: it is pushing.

“While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some pain to households and businesses,” Fed Chairman Jerome H. Powell said. . said in a closely watched 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 is also playing a political role, influencing the midterm elections. The Biden administration has been criticized by Republicans for extensive stimulus efforts early in the pandemic that helped boost the economy. And this summer, rising gas prices in May and June further soured Americans’ sentiments about the economy, sending consumer confidence plummeting and lowering President Biden’s poll numbers. .

Republicans have been seeking to frame their political message around inflation as they vie for control of the House and Senate. However, lately inflation has been losing some power with voters, especially as gas prices have fallen steadily from their summer highs and the job market is still turning.

In fact, Americans are starting to feel better on the economy and consumer confidence, which collapsed in June, has been creeping up. 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 a long overdue vacation. Farrell will put together safari packages for clients looking for even more extravagant trips.

Airfares are down from their summer surges, Farrell said. And for those who can afford it, the sheer excitement is taking the cost out of inflation.

“Travel is such an interesting barometer of consumer confidence,” Farrell said, en route to Chicago after a staff trip in Cancun. “We see that when consumers start to get a little anxious, booking windows get shorter or people don’t book trips that far. … But travel can actually escape a lot of what’s going on in the economy because there’s pent-up demand.”

The Fed is ready to go ahead with higher interest rates

Survey Data published on Monday by the New York Federal Reserve also showed that US consumers expect significant falls in future inflation levels. That’s good news for Fed officials who are convening for their September policy meeting next week. Inflation expectations can be self-fulfilling, and the Fed’s job becomes more difficult if households and businesses anticipate that inflation will remain high and change their behavior as a result.

The Fed has been raising rates at its most aggressive pace in decades, raising them by three-quarters of a percentage point in July. Fed and financial market watchers increasingly expect another raise of that scale next week, as the Fed scrambles to raise rates enough to slow the economy.

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“[The Fed] has said, ‘Listen, we’re not where we need to be, but at least we’re not that far behind,’” said Diane Swonk, chief economist at KPMG.

Still, the Fed’s moves can only address certain problems in the economy. The Russian invasion of Ukraine in February has already caused a massive spike in energy and gas prices this year, and White House officials are alarmed about a looming energy crisis in Europe after Russian President Vladimir Putin’s threats to force a bleak winter on the continent.

“Progress on inflation may not be sustainable if those geopolitical tensions escalate and Russia shuts off all oil supplies,” Brusuelas said. “So we are primed for another run of supply shocks.”

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