New data released on Friday show the Federal Reserve’s preferred inflation rate continues to rise, showing the central bank is grappling with stubborn problems in its attempt to contain the worst inflation in 40 years. increase.
of Personal consumption expenditure The inflation gauge produced by the Commerce Department, which is the official target of the Fed as it seeks to achieve 2% annual inflation, rose 6.2% in the year to August. That was down from 6.4% in 2018, but higher than the 6% economists had expected in a Bloomberg survey.
The details of the report were even more worrying. Overall, the rate of price increases has slowed slightly, but this is partly due to the decline in gas prices. After removing volatile food and fuel prices to get a handle on potential inflationary pressures, the index rose 4.9% in the year to August, accelerating from 4.7% the previous month. On a monthly basis, the core index also rose 0.6%, the fastest pace since June.
The data underscores the bumpy road the Fed faces in trying to push the US economy toward lower inflation. Consumers continued to spend in August, suggesting the economy still has momentum despite attempts by the central bank to raise interest rates to cool demand, slow hiring and ultimately keep inflation under control. suggests. With growth resilient, the Fed has become steadily more aggressive in its efforts to curb spending and keep inflation under control.
Federal Reserve Vice Chairman Lael Brainard said in a speech Friday, “Inflation is very high in the United States and abroad, and the risk of additional inflation shocks cannot be ruled out.” We are working hard to avoid a premature withdrawal,” he added.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So your dollar won’t go as well tomorrow as it did today. This is usually expressed as annual fluctuations in the prices of commodities and services such as food, furniture, clothing, transportation, and toys.
The Fed has hiked rates five times this year, including three extraordinarily large 3/4 point hikes, and Brainard said the economy will need to be capped for some time to ensure inflation is back under control. I repeated that there is But she also stresses that future rate hikes will depend on incoming data, suggesting the Fed will monitor the slowing economy and adjust moves accordingly.
Economists expect inflation to ease in the coming months as supply chains recover, the housing market slows, consumer demand cools, and the labor market slows. But Russia’s war in Ukraine poses constant risks to global supplies of food and oil, and industries, including automobiles, continue to be severely disrupted. Rent and other service costs are rising sharply, and labor shortages in many industries are pushing up wages, which could lead to higher prices.
These factors influenced the Fed’s decision to undertake its most aggressive campaign in decades to bring inflation under control. As fewer people buy homes and expand businesses, the effects should permeate the economy and labor market, with demand slowing to catch up with supply.
Still, the Fed’s war on inflation is at stake. Policy takes time to work and the Fed is moving so quickly to stem inflation that it is not waiting for the full effect of policy to take hold before introducing new policy. There is none. Other central banks are also raising interest rates, which, combined with the turmoil caused by the Ukraine war and other factors, could lead to a sharp slowdown in the global economy.
“The Federal Reserve’s policy deliberations will focus on how U.S. developments will affect the global financial system, and how foreign developments will affect the U.S. economic outlook and risks to the financial system,” Brainard said Friday. will be informed by analyzing how it affects
Understanding Inflation and How It Affects You
As higher interest rates hit the economy as a whole, slowing spending and weakening the labor market, central banks could push up unemployment and even trigger a painful recession. Officials hope outcomes can be avoided, but with inflation remaining persistently and painfully high and policy paths becoming more aggressive, avoiding a bad outcome is less likely. is acknowledging
A recession is bad for Americans, losing jobs and possibly slowing wage growth, but today inflation is also a burden on many household budgets. Families are beginning to find that they can no longer afford to buy everything from housing to clothing to groceries, and this has left low-income consumers with little room to cut spending from their budgets or replace it with cheaper options. It is especially burdensome for people.
The risk for the Federal Reserve is that people and businesses may get used to today’s rapidly rising prices. When that happens, they may adjust their behavior accordingly, with workers demanding faster wage increases and businesses passing on higher labor costs in the form of higher prices to customers. Inflation could then become a self-fulfilling prophecy.
good luck, measure of inflation expectations appears to be relatively stable, even declining somewhat in recent months. But Fed officials have made it clear they don’t want to take that stability for granted after more than a year of sharp inflation.
“The longer the current high inflation lasts, the more likely inflation expectations will take hold,” said Fed Chairman Jerome H. Powell. Press conference September 21st.