Gas prices drive inflation number jump
Gas prices drove more than half of the increase in the Consumer Price Index (CPI), resulting in a 0.6 percent rise in inflation across all categories from July to August. This is the highest increase since the summer of 2022. The higher fuel costs also led to cost increases in other sectors, such as plane fares, which rose nearly 5 percent after a couple of months of decline.
While prices at the pump have leveled off recently, energy costs remain unpredictable and could continue to counteract the Federal Reserve’s efforts to cool prices.
Is inflation under control?
It is difficult to say for certain, but there is some positive news in this report. Core inflation, which excludes volatile food and energy prices, rose 0.3 percent in August. This marks the third consecutive month of more normal pace core price increases. On an annual basis, core inflation dropped from 4.7 percent to 4.3 percent. Although still above the Federal Reserve’s 2 percent target, continued inflation within this range could eventually reach the target over time.
Rent is a significant contributor to current core inflation. However, newer leases suggest that rent increases have started to slow down. It takes time for this data to reflect in the CPI, as rents generally change annually and are tracked every six months. The hope is that the trend of housing costs boosting inflation will gradually fade.
Understanding different measures of inflation
The most useful measure of inflation depends on the specific purpose. Annual inflation is the best measure to determine how much the cost of living has increased over the past year. In this case, the annual inflation rate is 3.7 percent. However, for a clearer picture of the current trend, looking at the past three months is more informative. Annual inflation reflects what was happening last year, which is old news at this point.
The Federal Reserve prefers to look at core inflation because it provides a better indication of future trends. While food and gas costs are important to consumers, they may not be reliable indicators of what will happen next. In the past three months, core inflation has remained at a tolerable level of 2.4 percent. The hope is that this trend continues.
No immediate interest rate hike expected
Based on this report, it is unlikely that the Federal Reserve will raise interest rates next week. While policymakers have not ruled out the possibility of future rate hikes, they are expected to skip September to gather more data on whether inflation continues to slow. The current borrowing costs set by the Fed are already high, and maintaining the current rates should further slow the economy and ideally, inflation. This report does not suggest an urgent need for additional action.