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New signs of persistently high inflation in parts of the world’s largest economy are fueling fears that the decline in consumer price increases expected by many economists later this year will be bumpier than expected.
Data released Wednesday by the Bureau of Labor Statistics showed annual inflation, as measured by the consumer price index, accelerated to 3.7 percent in August following a rise in gasoline prices.
While “core inflation,” which excludes volatile items such as food and energy, hit its lowest annual reading in nearly two years in August, it also posted a stronger-than-expected monthly rise of 0.3 percent.
The August numbers leave economists and Federal Reserve officials wondering: Were the months of slowing price increases earlier this summer, which raised hopes that the central bank would win its battle to curb inflation, just a blip?
“This report really highlights the disinflation that the CPI data had previously indicated [August] may be progressing at a pace that is slower and less secular than one might have thought,” said Pooja Sriram, an economist at Barclays.
“We are still a long way from where we want to be to sustainably achieve the 2 percent inflation target,” she added, referring to the Fed’s goal.
After raising interest rates by more than 5 percentage points since March 2022, Fed policymakers are poised to keep interest rates at a 22-year high between 5.25 percent and 5.5 percent at their meeting next week and while maintaining an interest rate additional increase on the table this year.
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However, one concern in the August data is the increase in prices for goods such as household furniture and new vehicles, she said. These prices were moderate. If the trend continues or affects other goods, it threatens to undermine one of the assumptions behind economists’ thesis about disinflation this year.
Another source of concern in the August data was “core inflation excluding housing” – a closely watched measure of underlying inflation that measures core prices once the costs of energy, food and housing are stripped out. Last year, Fed Chairman Jay Powell said the indicator was “perhaps the most important category for understanding the future trajectory of core inflation” because it captures changes across the labor market.
“The risks actually appear to be tilted to the upside,” Sriram said, adding that a tight labor market and continued high consumer spending would continue to put pressure on prices across the economy.
Sriram’s team expects the Fed to raise interest rates by another quarter point in November. Thereafter, the core CPI annual rate is expected to remain at 3.6 percent through year-end before falling to 2.8 percent in December 2024.
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But there are caveats to core inflation excluding housing, said Alan Detmeister, a former Fed economist now at UBS, saying it can sometimes disproportionately reflect travel-related spending such as airfares and transportation services. It is often the “last mover” that shows a price slowdown. This suggests that only a few small sectors of the economy drove up inflation in August.
Combined with the many signs of a slowdown in the labor market, Detmeister is optimistic that inflation will continue to weaken, even if things will be “quite choppy” in the coming months.
Economists say this unrest will keep the Fed on its toes as it plans the final stages of its historic monetary tightening campaign – while weighing the risks of putting too much pressure on the economy.
In practice, this is likely to mean Fed officials signaling another quarter-point rate hike when the central bank releases another so-called “dot plot” of individual forecasts following its rate decision next week.
Detmeister is among economists betting that the Fed will not raise interest rates again, a view that is also reflected in futures markets. However, others believe that the central bank is not finished yet.
Jason Furman, a Harvard professor and economic adviser to the Barack Obama administration, said another rate hike is plausible in December or early next year, especially if inflation data doesn’t start to improve.
“Everything is not as bad as it looked a year ago, but it is probably not as good as it looked in June and July either,” he said. “If we have two more months like August, that would be a real problem for the Fed.”
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