August PCE inflation data shows prices stubbornly high

The Fed’s preferred gauge of inflation remained elevated in August, data released on Friday showed, further evidence that the central bank faces a lingering problem as it tries to quell the worst inflation in four decades.

the Personal consumption expenses The inflation measure, which is the measure the Fed officially targets as it tries to achieve 2 percent annual inflation, rose 6.2 percent for the year to August. While that was a 6.4 percent slowdown in July, it was higher than the 6 percent economists had expected in a Bloomberg survey.

The details of the report were even more worrying. Price increases have been moderating somewhat overall, in part because gasoline prices have been declining. But after discounting volatile fuel and food prices to get a sense of underlying inflationary pressures, the index rose 4.9 percent for the year to August, an acceleration from 4.7 percent the previous month. . And on a monthly basis, the core index rose 0.6 percent, the fastest rise since June.

consumers too kept spending in August, particularly in meals, travel and other services, the report showed, though the pace was slowing. Revenues rose, buoyed by an active job market.

The data underscored the challenging path ahead for the Fed as it tries to steer the US economy toward slower inflation. Both the economy and price pressures have maintained their momentum, even as central bankers raise interest rates to try to cool demand. As a result, the Fed has become increasingly aggressive in its efforts to restrain spending and moderate inflation, and is likely to keep raising rates and keeping them elevated for some time.

“Inflation is very high in the United States and abroad, and the risk of additional inflation shocks cannot be ruled out,” said Lael Brainard, Fed Vice Chair, said in a speech on Friday. He later added that policymakers were “committed to avoiding premature backtracking.”

The Fed has raised interest rates five times this year, including three unusually large hikes of three-quarters of a point, and Brainard reiterated that he would need to tighten the economy for some time to ensure inflation is brought back under control. But he also stressed that future rate hikes would depend on incoming data, suggesting the Fed will monitor the economy as it slows and gauge its moves accordingly.

Economists remain hopeful that healing supply chains, a housing market slowdown, cooling consumer demand and a moderating labor market will combine to reduce 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 overall spending may decline further as consumers tap into extra savings they racked up earlier in the week. pandemic.

But Russia’s war in Ukraine poses a continuing risk to the world’s food and oil supplies, and to some industries, including carsThey are still seriously disturbed. Rents and other utility costs have risen sharply, and labor shortages in many industries have pushed up wages, which could lead to higher prices.

These factors have informed the Fed’s decision to campaign more aggressively in decades to control inflation.

Fed officials signaled in their latest economic projections that they expect to raise interest rates another 1.25 percentage points by the end of the year. The report is likely to keep them on track for such a plan, said Subadra Rajappa, head of US rates strategy at Société Générale.

The above-expectations inflation figure “has to be something to worry about, but I don’t think it changes anything for the Fed,” he said. “They have more work to do.”

Still, the Fed’s war on inflation has a risk. Higher interest rates take time to filter through the economy, and the Fed is moving so fast in its bid to quell inflation, it is not waiting to see the effect of its moves before making new ones.

“They have to choose between looking forward or looking back,” said Blerina Uruci, markets economist at T. Rowe Price. He said new consumer data suggested consumers were pulling back, but that is taking time to show up in inflation data, so by focusing on price numbers, the Fed could end up raising rates more than necessary.

And other central banks are also raising rates, which could combine with the turmoil from the war in Ukraine and other factors to dramatically slow the global economy. Fed officials themselves have acknowledged that the global situation is in a state of flux.

“The Federal Reserve’s policy deliberations are based on analysis of how events in the US may affect the global financial system and how foreign events in turn affect the US economic outlook and risks to the global financial system. the financial system,” Brainard said Friday.

As higher rates act on the economy to slow spending and weaken the labor market, they could increase unemployment and even trigger a painful recession. While officials hope the outcome can be avoided, they admit the chances of avoiding a bad outcome have slimmed as inflation has remained stubbornly and painfully high and their policy has become more aggressive.

Still, central bankers have suggested it’s a necessary gamble. While a recession would be bad for Americans, costing them jobs and likely lowering their wage earnings, current inflation is also a burden on many households. Families are finding it more difficult to afford basic needs like shelter, clothing and food, which is a particular burden for lower-income consumers who have less room to cut expenses from their budgets or substitute cheaper options.

As inflation drags on, people and businesses may get used to today’s rapidly rising prices. If that happens, they can adjust their behavior accordingly, with workers asking for more frequent wage increases and companies passing on those higher labor costs to customers in the form of higher prices. If that happens, inflation could become a self-fulfilling prophecy.

Fortunately, measures of inflation expectations they appear to be relatively stable, and have even slowed down a bit in recent months. But Fed officials have made it clear that after more than a year of rapid price increases, they don’t want to take such stability for granted.

“The longer the current episode of high inflation lasts, the greater the chance that expectations of higher inflation will take hold,” Fed Chairman Jerome H. Powell said in his Press conference on September 21.