Earlier this year, as prices for common necessities such as gasoline and groceries began their inexorable rise, economists and market analysts seized on the monthly readout of the consumer price index for signs as to how entrenched inflation was becoming.
In June, the annual rate reached 9.1%, its highest level in four decades, stunning most observers and prompting the Federal Reserve to hike interest rates by a consecutive three-quarters of a point.
Now, however, with the rate easing to 8.5% in July, the focus has shifted to seeing how much inflation is receding from its peak, if that indeed has been reached. On Tuesday, the government will report the CPI for August, with expectations it may hit 8% or even break that barrier to 7.9%.
While that would still be nearly four times the rate the Fed sets as its average annual target of 2%, it would represent some small victory in the central bank’s battle against the scourge of steadily rising prices. The direction of inflation is often cited by economists as more important than the numerical level.
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The report will come a week before the Fed meets later this month to consider monetary policy going forward. The Fed does monitor the CPI, but it actually pays more attention to the core rate and also another measure, the personal consumption expenditures price index.
“Driven by a sharp 12.5% m/m decline in retail gasoline, we look for headline CPI to fall 0.2% in August, marking the largest sequential decline since April 2020,” Wells Fargo Managing Director and Senior Economist Sam Bullard wrote on Sunday.
“If realized, this would bring the year-over-year rate down for the second successive month to 7.9% from 8.5% in July,” Bullard added. “Declines in travel services and used cars should help hold the core CPI’s gain to 0.4% m/m (6.1% yr/yr), which is a tick higher than was recorded in July, though a significant improvement from the 0.6%-0.7% monthly gains registered in Q2.”
Tuesday’s number will have more than purely economic significance. With just two months left before the critical midterm elections, the White House is eager to see further progress on inflation. Already, gasoline prices have fallen sharply from $5 a gallon to around $3.75 today for a regular gallon of gas. Notably, ads mentioning inflation from the GOP candidates have tailed off in recent days as the Republican Party shifts to issues like crime and culture wars.
Still, it is premature to declare victory on inflation. The energy crisis in Europe, with Russia throttling gas supplies to its western neighbors, could still drive prices higher across the world. Labor markets remain strong and wages have been rising, albeit somewhat slower than a few months ago. And potential strikes in some key industries, like rail freight, could once again disrupt supply chains and produce higher costs for groceries and other essentials.
While long-time Fed watcher Hugh Johnson doubts the Fed will pause its interest rate hiking cycle anytime soon, he does see hope for the future.
“We would add that we anticipate that year/year consumer prices and the personal consumption price index are likely to decline meaningfully through 2023,” Johnson says.
“Will the combination of a slowdown in employment and a decline in inflation rates lead to a “pause” in the Federal Reserve shift toward restraint? Anybody’s guess,” Johnson adds.
On Monday, Adobe released its monthly digital price index showing that online prices rose 2.1% in August and 0.4% year over year, following a 1% monthly increase in July. Grocery prices, however, registered their highest annual price increase at 14.1%.
“The modest uptick we see in online prices for August was driven in large part by rising food costs that show no signs of abating, just as seasonal discounts in a category like apparel phased out through the end of Summer,” said Patrick Brown, vice president of growth marketing and insights, Adobe. “Consumer demand for e-commerce also remains steady and will keep prices elevated, especially for growing categories such as groceries, pet products, and other consumer staples.”
And while the consumer inflation report will dominate economic chatter this week, there are other important data points due to be released. Producer prices, the costs that businesses pay for their goods and services, will come on Wednesday, while Thursday brings retail sales for August and the week ends with Friday’s preliminary report on consumer sentiment for September.