Rising food and housing costs kept inflation high in August

Consumer prices in August climbed 0.1% compared with the month before, as food and housing costs pushed higher for millions of Americans.

A number of economists had been hopeful that falling energy prices in recent weeks would be enough to finally cool inflation, but government data released Tuesday showed how large price increases continue to persist on core items that make up a central part of most families’ budgets.

The figures came from the Bureau of Labor Statistics, which released its monthly Consumer Price Index. It showed that prices were up 8.3% in August compared with 12 months earlier, higher than analysts expected.

The overall figure was lower than the inflation rate notched in the previous two months, but still higher than expected given the sharp decrease in gasoline prices in recent weeks.

“We thought we’d see inflation start to come down, and instead what we’ve seen is inflation really sort of entrenched,” said Betsey Stevenson, professor of public policy and economics at the University of Michigan and a former member of the White House Council of Economic Advisers.

“If there’s no real progress, then that says, ‘Does the Fed need to take stronger action?’ And if the Fed needs to take stronger action, what does that mean for the risk to peoples’ livelihoods?”

The stock market fell sharply on the news, as investors fretted that the new data would embolden Federal Reserve officials to continue raising interest rates next week in an effort to slow inflation down.

Policymakers, economists and the American public are eager for consistent signs that inflation peaked this summer after soaring to the highest level in 40 years, squeezing households’ budgets on everything from groceries to medical care.

Looking ahead, officials are also growing concerned about how the global fight to tame inflation could be thwarted by a looming energy crisis in Europe, amid Russian President Vladimir Putin’s threats to force a bleak winter on the continent.

The monthly CPI report released Tuesday did not offer much reassurance that August brought major progress. The food index rose 11.4% over the past year, the largest 12-month increase since May 1979.

Food prices were up 0.8% just in the past month. Flour was up 2.2%, potatoes 2.5%, butter 1.9% and canned fruit 3.4%.

The Fed and some economists prefer to focus on a measure of inflation known as “core inflation,” which strips away more volatile categories such as food and energy.

But even that gauge came in hotter than expected and reflected added strain in people’s everyday lives. Costs for housing, medical care, new cars and household furnishings were all up compared with the month before.

Prices for water and trash collection services, hospital services and prescription drugs also picked up.

“We’re seeing services that aren’t housing, that aren’t energy services, that the inflation rate is picking up, and that worries people because that indicates higher entrenched inflation,” Stevenson said.

There were some exceptions. The gasoline index dropped 10.6% as prices at the pump fell off their summer highs. Costs for airfares and used cars also dropped.

Inflation is the economy’s biggest problem, and its toll falls hardest on vulnerable families with little room to absorb higher costs.

The Federal Reserve has been fighting inflation by raising interest rates, which is designed to slow down the economy by making all kinds of investments and loans – from mortgages to auto loans to hiring – more expensive.

The Fed’s goal is to use higher rates to dampen demand in the economy, especially since its tools can’t do anything to fix issues like supply chain logjams, worker shortages or the war in Ukraine.

Before the latest inflation report, markets had already expected the Fed to hike rates by three-quarters of a percentage point at its policy meeting next week. That now appears to be fully locked in.

Still, the fight against inflation brings heavy consequences and could eventually jolt the economy too forcefully, triggering a recession and a new wave of job losses. Still, the Fed has sent a clear message: It is pressing on.

“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Fed Chair Jerome H. Powell said in a closely watched speech last month.

“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Inflation is also playing a political role, influencing the midterm elections.

The Biden administration has been hammered by Republicans for sprawling stimulus efforts from earlier in the pandemic that helped turbocharge the economy.

And this summer, surging gas prices in May and June soured Americans’ feelings about the economy even more, causing consumer sentiment to plummet and pulling down President Biden’s poll numbers.

But gas prices have been on a steady decline. After topping $5 in June, the national average for a gallon of gas was $3.70 on Tuesday, according to AAA.

Republicans have been looking to frame their political message around inflation as they vie for control of the House and Senate.

Yet, inflation has lately been losing some potency with voters, especially as gas prices have consistently fallen from their summer highs and the job market is still cranking.

Indeed, Americans are beginning to feel better about the economy, and consumer sentiment, which collapsed in June, has been inching up.

Lynn Farrell, president and owner of Chicago-based Windy City Travel, said business is booming, especially on luxury travel.

People want to fly first class after long-delayed vacations. Farrell will put together safari packages for clients seeking even more extravagant trips.

Airfares have come down from their summer surges, Farrell said.

And for those who can afford it, sheer excitement is cutting through inflation’s toll.

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

Survey data released Monday from the New York Fed also showed American consumers expecting significant declines in future inflation levels.

That is welcome news for Fed officials gathering for their September policy meeting next week.

Inflation expectations can be self-fulling, and the Fed’s job gets harder if households and businesses anticipate that inflation will stay high and change their behavior as a result.

The Fed has been raising rates at its most aggressive pace in decades, and increased them by a whopping three-quarters of a percentage point in July.