Rising gas prices contributed to higher inflation in August

Rising gas prices contributed to higher inflation in August
Source: Google

A surge in gasoline prices had a notable impact on inflation in August, but most other expenses showed more modest increases, indicating an overall cooling trend in price hikes.

In a set of contradictory data released on Wednesday, the Labor Department reported that the consumer price index (CPI) increased by 3.7% in August compared to the previous year, up from July’s 3.2% annual rate. However, when you exclude the volatile food and energy categories, referred to as core prices, they rose by 4.3%, a slight pullback from July’s 4.7%, marking the smallest increase in nearly two years. Nevertheless, this figure remains well above the Federal Reserve’s 2% target.

Despite the apparent disparity in these figures, the dip in core prices suggests that inflation is gradually coming under control. The Federal Reserve closely monitors core prices because they are considered a more reliable indicator of future inflation trends.

The release of Wednesday’s data makes it increasingly likely that the Fed will abstain from raising interest rates at its upcoming meeting next week. While higher gas prices could contribute to increased inflation this month, most economists anticipate that inflation will gradually ease by year-end.

On a monthly basis, consumer prices surged by 0.6% in August, marking the largest increase in over a year. Gasoline prices shot up by nearly 11%, although they have since stabilized, with the average nationwide pump price remaining unchanged at $3.85, according to AAA, compared to a month ago.

The significant surge in gas prices accounted for more than half of the monthly inflationary increase, as reported by the government.

When food and energy were excluded, core prices saw only a 0.3% increase from July to August, albeit up from 0.2% in the previous two months.

Energy costs saw a substantial 5.6% rise in August alone, marking the most significant monthly increase since June 2022. Auto insurance prices also saw a notable increase, rising by 2.4% last month and a substantial 19.1% compared to a year earlier. The sharp increase in new car prices over the past two years has made them more costly to insure and repair.

However, for many other items, prices increased at a slower pace or even declined last month. Used car costs dropped by 1.2%, marking the third consecutive decrease, while hotel prices fell by 3%, also marking the third straight decline.

Grocery prices inched up by 0.2%, a trend that has put financial strain on many households. Nevertheless, the rate of food cost increases is moderating, with a 3% rise compared to a year ago, down from the double-digit increases seen last year.

Federal Reserve officials are beginning to consider the notion that inflation is becoming more manageable, even though Chair Jerome Powell stated last month that it was still “too high.”

In his prominent speech at Jackson Hole, Powell indicated that the Fed would approach any further rate hikes “carefully,” which many economists interpreted as an opening for the Fed to skip a rate increase at its meeting on September 19-20. A key rate increase by the Fed typically results in higher mortgage rates, auto loan rates, and business borrowing costs.

Over the past 12 meetings, the Fed has raised its benchmark interest rate 11 times, bringing it to around 5.4%, the highest level in 22 years. It increased the rate by a quarter-point in July after leaving it unchanged in June.

Lorie Logan, the president of the Federal Reserve’s Dallas branch, stated last week that “another skip could be appropriate” at the next meeting, but clarified that skipping does not imply a complete halt.

According to CME’s FedWatch, investors see only a 3% chance of a rate hike next week. However, they have priced in a 40% chance of an increase at the Fed’s subsequent meeting in November.

The European Central Bank is also contemplating a key interest rate increase at its next meeting on Thursday, although officials may opt to skip it as well. The European economy is approaching recession as it grapples with high inflation and rising borrowing costs.

According to a gloomy forecast issued on Monday by the European Commission, the executive arm of the European Union, the 20 countries that use the euro currency are expected to grow by just 0.8% this year. Germany’s economy, the largest in the EU, is projected to contract by 0.4%. Inflation in the EU is higher than in the U.S., standing at 5.3% in July, though it is half of the peak of 10.6% reached in October.