August PCE inflation data shows prices are stubbornly high

Data released on Friday showed that the Fed’s preferred measure of inflation remained elevated in August, further evidence that the central bank is facing an intractable problem as it tries to stifle the worst inflation in four decades.

The personal consumption expenditures The inflation gauge, the measure the Fed is officially targeting as it tries to achieve annual inflation of 2 percent, rose 6.2 percent in the year to August. While that was a slowdown from 6.4 percent in July, it was higher than the 6 percent that economists in a Bloomberg survey had expected.

The details of the report were even more disturbing. The price increases were fairly moderate on an overall basis, in part because of that gas prices been reduced. But after excluding volatile fuel and food prices to learn about underlying inflationary pressures, the index rose 4.9 percent in the year to August, an acceleration from 4.7 percent in the previous month. On a monthly basis, the core index rose 0.6 percent, the fastest increase since June.

Consumers too keep spending The report showed in August, particularly with regard to food, travel and other services, although the pace has slowed. Incomes rose, supported by a hot labor market.

The data underlined the difficult path the Federal Reserve is facing as it tries to steer the US economy toward slowing inflation. Both the economy and price pressures maintained momentum, even as central bankers raised interest rates in an effort to cool demand. As a result, the Federal Reserve has become steadily bolder in its efforts to constrain spending and ease inflation, and will likely continue to raise interest rates and keep them high for a while.

“Inflation is very high in the US and abroad, and the risk of additional inflationary shocks cannot be ruled out,” said Lyle Brainard, Fed Vice President, He said in a letter Friday. She later added that policy makers are “committed to avoiding a premature decline.”

The Fed has raised interest rates five times this year, including three unusually large increases of three-quarters of a point, and Ms Brainard emphasized that it would need to constrain the economy for some time to make sure inflation was back under control. But she also emphasized that future interest rate increases will depend on incoming data, indicating that the Fed will be watching the economy as it slows and adjusting its moves accordingly.

Economists are still hopeful that supply chains, a sluggish housing market, cooling consumer demand and a mild labor market will combine to lower inflation in the coming months. Spending on goods fell in August for the second month in a row, which should ease pressure on factories and shipping routes, and public spending could slow further as consumers withdraw the extra savings they accumulated earlier in the pandemic.

But Russia’s war in Ukraine poses a constant threat to global supplies of food and oil, and to some industries, including cars, remains severely disabled. Rents and other service costs have risen sharply, and labor shortages in many industries have pushed up wages, which could drive prices up.

These factors informed the Fed’s decision to launch its most aggressive campaign Over the decades to control inflation.

Federal Reserve officials indicated in their latest economic forecast that they expect to raise interest rates by another 1.25 percentage points by the end of the year. Subhadra Rajappa, head of US price strategy at Société Générale, said the report might keep them on track for such a plan.

She said the above-expected inflation figure “should be somewhat concerning, but I don’t think it changes anything for the Fed.” “They have more work to do.”

The Fed’s war on inflation remains risky. High interest rates take time to filter through the economy, and that’s what the Fed does moving fast In its attempt to stifle inflation, it does not wait to see the effect of its movements before entering into new ones.

New consumption data suggests consumers are holding back, but that takes time to show up in inflation data — so by focusing on price numbers, the Fed could end up raising interest rates more than it is, said Plerina Orochi, markets economist at T. wanted.

Other central banks are also raising interest rates, which could combine with the turmoil caused by the war in Ukraine and other factors to slow the global economy sharply. Fed officials themselves have admitted that the global situation is in flux.

“Federal policy deliberations are based on an analysis of how US developments affect the global financial system, and how external developments in turn affect the US economic outlook and risks to the financial system,” Ms Brainard said on Friday.

As higher rates play through the economy to slow spending and weaken the labor market, they can drive up unemployment and even cause a painful recession. While officials hope that this outcome can be avoided, they acknowledge that the chances of avoiding a bad outcome have diminished as inflation has remained persistently and painfully high and their policy course has become more aggressive.

However, central bankers pointed out that it is a necessary gamble. While economic stagnation would be harmful to Americans, costing them their jobs and likely slowing their wage gains, today’s inflation is also a burden for many families. Families find it difficult to afford basic necessities such as housing, clothing and food, a particular burden on lower-income consumers who have less room to cut spending from their budgets or substitute for cheaper options.

With inflation continuing, individuals and businesses may get used to today’s high prices quickly. If that happens, they may adjust their behavior accordingly, with workers asking for wage increases more frequently and companies passing on higher labor costs to customers in the form of higher prices. If that happens, inflation could become a self-fulfilling prophecy.

Luckily, Inflation expectations metrics It appears to be relatively stable, and has even decreased somewhat in recent months. But Fed officials have made clear that after more than a year of rapid rate increases, they do not want to take this stability for granted.

Jerome H. said: Press Conference On September 21.