Rising Energy Costs Likely Increased Inflation Rate in August

Introduction

Rising energy costs likely increased the rate of inflation in August, economists are predicting ahead of Wednesday’s monthly government report on prices.

Gas Prices

• A gallon of regular unleaded gas cost $3.82 on average as of last week.
• This is roughly $1.50 more than it cost before the pandemic.
• Gas prices are continuing to rise.

Impact on Federal Reserve

Any acceleration in the inflation rate probably won’t be high enough to prompt the Federal Reserve to fight rising prices with another interest-rate hike later this month. However, there may be another bump before the end of the year.

Consumer Price Index Forecast

The U.S. government’s consumer price index is forecast to show inflation rose 3.6% to 3.7% last month compared with a year earlier and above the 3.2% rate in July. Economists say that inflation above the Fed’s 2% target could lead to another increase in the next few months.

Stock Futures

Stock futures fell ahead of the CPI report. Futures tied to the broad S&P 500 stock index slipped 0.1%, while Dow futures eased 0.14%. Nasdaq futures edged down 0.1%.

What is the Inflation Reduction Act?

The Inflation Reduction Act, passed by Congress and signed into law by President Biden last summer, impacts aspects of the economy ranging from the environment to corporate taxes to the price of insulin. Some of its key changes include capping insulin prices at $35 a month for Medicare recipients, implementing a 15% minimum corporate tax and 1% fee on stock buybacks, reducing the costs of heating and lighting homes, and shrinking carbon emissions by 40% in the next seven years through a combination of tax incentives and clean energy investments.

Importance of CPI

The Federal Reserve watches two key measures of the economy, price stability, and maximum employment, which are its main considerations in interest-rate decisions. The CPI gives the Fed guidance to assess whether prices are “stable.”

Georgia Gov. Brian Kemp Declares State of Emergency

In response to high gas prices, Georgia’s governor declared a state of emergency, temporarily suspending the state’s excise tax on motor and locomotive fuel to help struggling residents.

Release of CPI

The Consumer Price Index (CPI) will be released by the Department of Labor at 8:30 AM ET on Wednesday.

What is CPI?

The Consumer Price Index (CPI) looks at the average change in prices for particular products and services during a period of time, according to the Bureau of Labor Services.

Current Inflation Rate

In August, the government reported that prices rose 3.2% in July compared with a year earlier. The slight increase was largely due to a technicality in the way annual price hikes are measured. Still, it ended a 12-month stretch in which the rate of consumer price increases steadily declined.

August CPI Forecast

The August inflation rate is expected to be between 3.6% and 3.7%, up from the 3.2% rate in July.

Conclusion

While rising energy costs are likely to contribute to an increase in the inflation rate, it may not be high enough to prompt the Federal Reserve to take immediate action. However, economists predict that inflation above the Fed’s target could lead to another interest-rate hike in the coming months.