Driven by consumers, US inflation spreads wider across economy – NBC Connecticut

US inflation is showing signs of entering a more stubborn phase that will likely require drastic action from the Federal Reserve, a shift that has sent panic to financial markets and heightened recession risks.

Some of the long-standing drivers of rising inflation — soaring gasoline prices, supply chain issues, soaring used-car prices — are fading. Yet the underlying measures of inflation are deteriorating.

The continued shift in the forces driving inflation near a four-decade high has made it harder for the Fed to rein it in. Prices are no longer increasing as some categories have exploded in cost. Instead, inflation has now spread more widely through the economy, fueled by a strong labor market that is boosting wages, forcing businesses to raise prices to cover higher labor costs. high and giving more consumers the means to spend.

On Tuesday, the government said inflation rose 0.1% from July to August and 8.3% from a year ago, down from June’s four-decade high. by 9.1%.

But excluding the volatile food and energy categories, so-called core prices unexpectedly jumped 0.6% from July to August, following a more moderate 0.3% rise the previous month. The Fed is watching core prices closely, and the latest numbers heightened fears of an even more aggressive Fed and sent stocks plunging, with the Dow Jones plummeting more than 1,200 points.

The core price numbers heightened concerns about inflation spreading to all corners of the economy.

Inflation rose 0.1% in August despite a sharp drop in gasoline prices, according to the Consumer Price Index report released on Tuesday. Although it may not seem like much, inflation affects our daily lives. Lori Bettinger, president of Bancalliance and former director of TARP, joins LX News to discuss the exact impact of this increase in inflation on your daily expenses.

“One of the most remarkable things is the magnitude of the price gains,” said Matthew Luzzetti, chief US economist at Deutsche Bank. “The underlying inflation trend has certainly not shown progress towards moderation so far. likely to be more persistent.”

Demand-driven inflation is a way of saying that consumers, who account for nearly 70% of economic growth, keep spending, even though they don’t like paying more. This is partly due to widespread income gains and partly because many Americans still have more savings than before the pandemic, having postponed spending on vacations, entertainment and restaurants.

When inflation is driven primarily by demand, it may require more drastic action from the Fed than when it is driven primarily by supply shocks, such as an oil supply disruption, which can often resolve on their own.

Economists fear that the only way for the Fed to slow strong consumer demand is to raise interest rates high enough to sharply increase unemployment and potentially trigger a recession. Typically, as fear of layoffs increases, not only do the unemployed reduce their spending. The same goes for the many people who fear losing their jobs.

Some economists now believe the Fed will need to raise its benchmark short-term rate much higher, to 4.5% or more, by early next year, more than previous estimates of 4%. (The Fed’s key rate is now in a range of 2.25% to 2.5%.) Higher rates from the Fed would in turn lead to higher costs for mortgages, loans automobiles and business loans.

The Fed is widely expected to raise its short-term policy rate by three-quarters of a point next week for the third time in a row. Tuesday’s inflation report even led some analysts to speculate that the central bank might announce a full one percentage point hike. If so, it would represent the largest increase since the Fed began using short-term rates in the early 1990s to guide consumer and business borrowing.

Although headline inflation barely rose last month, core inflation, which reflects broader economic trends, has deteriorated. A measure the Federal Reserve Bank of Cleveland uses to track median inflation, which essentially ignores the categories with the biggest swings in price, rose 0.7% in August. This is the largest monthly increase since records began in 1983.

Rising prices have yet to cause much of what economists call “demand destruction” – a pullback in spending that could stifle inflation. Although rising gas prices have caused Americans to drive less, there isn’t much evidence of deep reductions elsewhere.

Restaurant prices, for example, jumped 0.9% in August and are up 8% over the past year. But that didn’t noticeably deter people from going out. Restaurant traffic exceeded pre-pandemic levels on Open Table, an app that tracks reservations, and continued to rise in September.

Overall, consumers largely held their own spending, even with runaway inflation, but perhaps gritted teeth. In July, spending rose 0.2% after adjusting for higher prices.

The spread of inflation in services, such as rental costs and health care, largely reflects the impact of rising wages. Hospitals and medical practices have to pay more for nurses and other staff. And as more Americans find jobs or get raises, they may move out of family homes or part ways with roommates. Rental costs have risen 6.7% over the past year, the highest since 1986.

Wages and salaries jumped 6.7% in August from a year earlier, according to the Federal Reserve Bank of Atlanta’s wage tracker, the biggest increase in nearly 40 years. And Luzzetti noted that the same data shows a record wage premium for people who change jobs, compared to those who stay put. This means that employers are still offering big raises to try to fill jobs.

Economists had hoped higher prices for services would be offset by lower costs for goods such as new and used cars, furniture and clothing, after those items peaked in the pandemic. As supply chain safeguards improved, better flow of these goods was expected to bring prices down.

Yet, so far, this has not happened.

“We’ve seen shipping costs go down, we’ve seen supply chain congestion ease a bit, production has improved and inventories have gone up,” said Laura Rosner-Warburton, senior economist. at MacroPolicy Perspectives. “So all of this suggests some improvement on the supply side. And yet companies are still experiencing large price increases for these goods, and that’s problematic.

President Joe Biden held an event on Tuesday to celebrate the recently passed Cut Inflation Act.

Such trends could reignite the debate about the extent to which companies’ ability to raise prices has been fueled by a lack of competition, a phenomenon called “greed.” But most economists attribute the ability of companies to charge even more to consumers’ willingness to pay.

“It seems retailers are now raising prices because they can, not because they have to. Consumer demand is still too strong,” said Aneta Markowska, chief economist at Jefferies, an investment bank, in a research note.

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