Consumer prices are expected to post the biggest gain in August in more than a year. According to economists polled by the Wall Street Journal, consumer prices are anticipated to jump 0.6% in August, marking the largest increase in 14 months. This is in contrast to the minimal growth seen in the past three months.
The Chief Culprit: Higher Oil Prices
The recent surge in oil prices, up by almost 25% since late July, is the main driver behind this significant increase. Some parts of the U.S. have even experienced gas prices surpassing $4 per gallon.
As a result, the yearly rate of inflation for August is projected to climb to 3.6% from 3.2% in July and from a 27-month low of 3% in June.
Core Inflation: Stripping Out Food and Energy
To gain a more accurate understanding of the underlying trend in inflation, it is important to analyze the core rate of Consumer Price Index (CPI). This core rate removes the volatile components of food and energy.
In August, the core CPI is forecasted to rise by a smaller 0.2%, consistent with recent trends. Furthermore, the yearly rate of core inflation is expected to drop to a 22-month low of 4.3%, down from 4.7% in the previous month.
Although this figure still surpasses the Federal Reserve’s 2% inflation goal, core inflation has steadily declined from its peak of 6.6% one year ago. This downward trend is likely to persist.
In conclusion, while inflation is poised to make a notable increase in August due to soaring oil prices, the overall trend suggests that inflation in most sectors of the economy is easing. Economists anticipate this slowdown to continue, providing the Federal Reserve with the opportunity to conclude its current round of interest-rate increases aimed at curbing inflation.
The Impact of Rent and Home Prices on Inflation
Inflation is a concerning issue that economists Aichi Amemiya and Jeremy Schwartz of Nomura believe is being driven by rising rents and home prices. According to their analysis, shelter costs have increased by a staggering 7.7% in the past year, which is more than double the level before the pandemic.
However, there is some positive news to be found amidst the turbulence. While rents are indeed rising, the rate of increase has slowed down. In July and June, rents only rose by 0.4%, which is half as fast as in early 2023.
The Federal Reserve (Fed) officials are also hopeful that they will see some relief in terms of shelter costs, which will help alleviate the inflationary pressure. Their expectation is that this relief will eventually lead to a decrease in the rate of inflation. Nevertheless, due to the way these costs are calculated in the consumer price index (CPI), it may take several months or more for any significant changes to be reflected.
Unexpected Factors Influencing Inflation
The recent surge in U.S. inflation has brought about a series of surprises reminiscent of the early 1980s. One notable surprise is the sharp decline in the cost of plane tickets. This unexpected development has played a crucial role in delivering three consecutive months of low inflation readings since May.
In fact, airfares have consistently fallen for four months in a row, with July and June witnessing back-to-back declines of 8.1%. However, it’s important to note that this trend may not persist for much longer. Rising fuel prices are likely to impact airfares, and Americans continue to fly at near-record levels.
In conclusion, while there are some positive signs in terms of rent and home price increases slowing down, there are still uncertainties and unexpected factors that can impact inflation trends in the future. The Fed’s cautious approach to policy rates reflects their belief that the underlying inflation trend remains soft and warrants a conservative stance.