Inflation Accelerates as Gas Prices Jump

Inflation Accelerates as Gas Prices Jump

REUTERS/Mike Blake

Inflation picked up in August, the Labor Department reported Wednesday, with the topline consumer price index coming in at 3.7% on a 12-month basis, up from the 3.2% annual rate recorded in July. On a monthly basis, consumer prices increased 0.6% — the largest month-over-month increase in a year.

Driven in large part by the cost of gasoline — up 10.6% in August, accounting for more than half of the overall increase – the rise in the price index serves as a reminder that it could take some time to get inflation all the way back down to pre-pandemic levels, and the path ahead could be rocky.

Still, some analysts saw encouraging signs in the details of the report.

Core inflation — an alternative measure closely watched by the Federal Reserve that strips out fuel and food prices — rose 4.3% on an annual basis. That’s a better result than the 4.7% rate recorded in July, though it was higher than expected and still well above the Fed’s 2% target. Economist Justin Wolfers of the University of Michigan noted that core inflation has been moderating for several months in a row, long enough to declare a trend. “There’s a lot of cause for optimism. In fact, core CPI over the past three months has risen at an annual rate of only 2.5%, which is remarkably lower than the rates we’d been seeing earlier,” he told CNN.

Economist Paul Krugman echoed that sentiment, saying that “we've seen remarkable disinflation” as far as the core measure is concerned. “And bear in mind that core is still being distorted by lags in the measured price of shelter,” he added. “So basically the data are now saying that the war on inflation has been pretty much won — without a recession.”

But most economists say it’s too early to declare victory in the battle against inflation. “The path down on inflation is littered with potholes. We hit one in August,” Diane Swonk, chief economist at KPMG, wrote. “The Fed needs to see quarters, not months, of fundamentally cooler inflation to cut rates. We are not even close.”

Fed to hold steady for now: Although the latest data show inflation moving in the wrong direction, Fed officials are expected to treat it more as a blip than a trend, and most analysts expect the central bank to hold steady on interest rates at the next meeting of the Federal Open Market Committee, later this month. If such a blip appears again, however, the Fed could feel the need to continue raising rates.

“Today's inflation report likely does not move the needle much for the FOMC ahead of its session next week – no rate hike remains the base case, especially given the considerable tightening that has yet to completely work its way through the economy,” Jason Pride, chief of investment strategy and research at Glenmede, said in a note. “However, the pickup in inflation may increase the chance of additional tightening before year-end, as getting the inflation genie back in the bottle does not appear as straightforward as some would have hoped.”