August uptick leaves economists asking if earlier signs of cooling demand were just a blip
Fresh signs of stubbornly high inflation in corners of the world’s largest economy are fuelling fears that the retreat in consumer price increases many economists expected later this year will be bumpier than anticipated.
Data released by the Bureau of Labor Statistics on Wednesday showed annual inflation, as measured by the consumer price index, accelerated to 3.7 per cent in August, following a jump in petrol prices.
While “core” inflation, which strips out volatile items such as food and energy, in August registered its lowest annualised level in almost two years, it too recorded a larger than expected monthly gain of 0.3 per cent.
The August numbers leave economists and Federal Reserve officials with a lingering question: were the months of slowing price increases earlier this summer, which prompted hopes that the central bank was winning its battle to tame inflation, just a blip?
“This report really speaks to the fact that the disinflation that the CPI data had been indicating prior to [August] is perhaps proceeding at a pace that is more gradual and less secular than one would have thought,” said Pooja Sriram, an economist at Barclays.
“We’re still some distance away from where we would like to be to sustainably meet the 2 per cent inflation target,” she added, referring to the Fed’s goal.
Having raised the benchmark interest rate over 5 percentage points since March 2022, Fed policymakers are poised to hold the federal funds rate steady at a 22-year high of between 5.25 per cent to 5.5 per cent at their meeting next week, while still keeping an additional increase on the table this year.
But one worry in the August data was the pop in prices for goods such as household furnishings and new vehicles, she said. Those prices had been moderating. If the trend continues or affects other goods, it would threaten to undermine one of the assumptions behind economists’ thesis about disinflation this year.
Another source of anxiety in the August data stemmed from “core inflation ex-housing” — a closely watched metric of underlying inflation measuring core prices once energy, food and housing-related costs are stripped out. Last year, Fed chair Jay Powell said this gauge “may be the most important category for understanding the future evolution of core inflation”, given it captures changes across the labour market.
“The risks do appear to be skewed to the upside,” Sriram said, adding that a tight labour market and persistently strong consumer spending would continue to put pressure under prices across the economy.
Sriram’s team projects the Fed will raise rates by a quarter point once more, in November. After that, it expects the annual rate of core CPI to hover at 3.6 per cent by the end of the year, before drifting down to 2.8 per cent in December 2024.
But there are caveats about core inflation ex-housing, said Alan Detmeister, a former Fed economist now at UBS, which is that it can sometimes disproportionately reflect travel-related expenses such as airfares and transportation services. It is also often the “last mover” to show a deceleration in prices. That suggests just a few narrow segments of the economy pushed up August’s inflation.
Coupled with the many signs that the labour market is cooling, this leaves Detmeister optimistic that inflation will continue to moderate, even with “quite a lot of choppiness” in the months to come.
It is such choppiness that economists say will keep the Fed on edge as it charts out the final stages of its historic monetary tightening campaign — while weighing the risks of squeezing the economy too much.
In practice that is likely to mean Fed officials signal one more quarter-point interest rate increase when the central bank publishes another so-called “dot plot” of individual projections following its rate decision next week.
Detmeister is among economists wagering the Fed will not follow through with another rate rise — a view reflected as well in futures markets. However, others think the central bank is not yet done.
Jason Furman, a Harvard professor who served as an economic adviser to the Barack Obama administration, said another rate rise is plausible in December or early next year, especially if the inflation data do not begin to improve.
“Everything is not as bad as it looked a year ago but probably isn’t as good as it looked in June and July,” he said. “If we have two more months like August, that would be a real problem for the Fed.”
Source: Financial Times
