The Fed’s preferred inflation measure shows prices rose again last month


After hitting a 40-year high in June, the Federal Reserve’s preferred measure of consumer inflation is once again signaling a warning sign of continued high prices.

The Bureau of Economic Analysis said on Friday that the Consumer Price Index for August rose 6.2% from a year earlier, following a revised reading of 6.4% in July. This was seen as the driver behind the central bank’s decision earlier this month to raise its benchmark rate by three quarters of a percentage point for the third time in a row.

Looking at the monthly data, the PCE price index increased by 0.3%.

The core inflation measure, which excludes the volatile categories of food and energy and is most closely watched by Fed policymakers, rose 4.9% year-over-year in August, up from 4.7% in July. Core PCE rose 0.6% for the month, a jump from July’s revised 0%.

The latest inflation data puts more pressure on Fed Chairman Jerome Powell, who has vowed to make taming inflation a “main focus” of the central bank.

The August Consumer Price Index, another key inflation gauge, surprised economists in mid-September with the headline reading for the month rising instead of falling as expected.

The Fed has been struggling for months to contain runaway inflation by raising rates, with just five hikes so far this year, including three straight hikes, embarking on its most aggressive tightening cycle in four decades. -a quarter of a percentage point each.

But so far, economists say, the minimal drop in headline inflation is due almost entirely to lower energy costs. This is reflected in the stubborn persistence of high core inflation, which has pushed back energy and food prices.

This is bad news for the Fed. Its main policy tool – raising interest rates and making borrowing more expensive to cool demand – has no effect on the supply shocks that characterize the current inflationary environment.

Speaking on Friday, Fed Vice President Lael Brainard was forthright in his assessment of the severity of domestic and global economic risks. “Inflation in the United States and abroad is very high, and the risk of additional inflationary shocks cannot be ruled out,” he said in recent remarks.

Brainard warned that the fight against inflation could be prolonged. “Monetary policy should be restrictive for a while,” he said. “We are determined to avoid premature withdrawal.”

Mike Antonelli, Baird’s managing director, echoed this sentiment, saying: “It is impossible for anyone to claim victory over inflation anytime soon. It will just take time. The things that really need to come down, like shelter and wages, will take a while,” he said.

“The wild card … is these structural things that keep it going, which can be unaffected by interest rate moves by the Federal Reserve,” said Thomas Martin, senior portfolio manager at Globalt Investments. Of high core inflation in particular, he said, “It continues to really put a floor under what the Fed and all the other central banks can do.”

This double-edged dynamic in headline inflation while core inflation is rising has been linked to lower energy prices – a concern for economists who have warned that the Northern Hemisphere is entering winter and that the respite, along with the Organization of the Petroleum Exporting Countries, will not last. its oil-producing allies are said to be considering further output cuts.

“Psychologically, when you go to the gas pump and see lower prices, you feel a little bit better. It’s helped consumer sentiment a little bit lately, but … it’s been a better predictive fundamental over time,” Martin said.

“The drop in energy prices, which hit record highs this summer, is great news for American consumers and the sustainability of the economic expansion,” said Bill Adams, chief economist at Comerica Bank.

But that tailwind comes with diminishing returns, he added. “A major upside risk to inflation in the near term is the possibility of rising energy prices, especially given the explosion of the Nord Stream pipeline in the Baltic Sea and no sign of a quick end to the Russia-Ukraine war,” he said.

“Statistics now show that household finances are under even more pressure [and] “Discretionary consumer spending will be less of a driver of the economy in the fall and winter,” Adams said. “Viewed in conjunction with other monthly indicators we have for August, this data suggests that the economy grew last month, but at a slower pace and will slow further.”

Spending in August rose 0.4% for the month, following a downwardly revised -0.2% level in July. Spending on services, particularly health and transportation, fueled growth, the IEA said.

Personal income increased by 0.3% and disposable income by 0.4%. At 3.5%, the personal savings rate has fallen by nearly a full percentage point since the start of the year., as households cope with rising costs by reducing savings accumulated at the start of the pandemic.

“On the personal income side of things, nominal incomes are growing really well … but we know that’s all being eaten up by inflation, so you already have that dynamic,” said James McCann, Abrdn’s deputy chief economist. . “The risk is that people are constantly trying to beat inflation with higher wages, and I think that’s a big risk for the Fed.”

As labor force participation is depressed, workers are protecting their reputation to do so. This narrows the Fed’s window of opportunity to suppress inflation without triggering a recession.

“We just don’t see the labor market boiling over,” Martin said.

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