US inflation is slowing again due to cheaper gas, according to the CPI.  Yet prices are skyrocketing for almost everything else

US inflation is slowing again due to cheaper gas, according to the CPI. Yet prices are skyrocketing for almost everything else

Numbers: Falling gasoline prices last month resulted in a second straight decline in US inflation, with the consumer price index rising just 0.1% in August. But the report also shows that inflation has spread more widely through the economy and should prompt the Federal Reserve to raise interest rates sharply again.

Economists polled by the Wall Street Journal had forecast a 0.1% drop in the CPI.

At the same time, the slight increase in the main CPI last month brought the annual inflation rate down to 8.3%, from 8.5% in July and 9.1% in June. The June reading was the highest since 1981.

In a more ominous sign, the so-called core inflation rate which omits food and energy prices rose 0.6%. Wall Street had forecast a 0.3% gain.

The Fed views the base rate as a more accurate measure of future inflation trends.

The increase in the base rate over the past year has risen from 5.9% to 6.3%, underscoring how entrenched inflation has become in the economy. The cost of basic necessities such as food, rent, medical care, home furnishings and new cars all rose last month.

By contrast, inflation rose by an average of less than 2% per year in the decade before the pandemic.

Big picture: The Fed is expected to raise interest rates through the end of 2022 in an attempt to put out the worst inflationary fire in four decades, but it still has a long way to go to get back to pre-pandemic levels.

The central bank, however, risks a US recession if it goes too far. Higher interest rates reduce inflation by increasing the cost of borrowing for consumers and businesses and thus slowing the economy.

The central bank is poised for another oversized rate hike at its next meeting on Sept. 20-21 in Washington. The disappointing CPI report suggests another three-quarters of a percentage point increase is on the way.

Key details: Tepid headline CPI readings in August and July were primarily driven by falling gasoline prices. The government said petrol prices fell 10.6% last month. The average US cost of a gallon of gasoline, which topped $5 for the first time in June, fell to $3.83 by the end of August.

It has since fallen to $3.69 in September, the Energy Information Administration reported, suggesting further weak headline inflation in the next CPI report.

The rest of August’s report, however, was filled with warning signs about inflation.

The cost of groceries jumped again last month and has risen 11.1% over the past year, the biggest increase since 1979.

Rents jumped 0.7% in August, as did housing. The Fed is particularly concerned about rising rents as it is one of the biggest contributors to inflation and shows few signs of a reversal.

Rents rose 6.3% over the past year to mark the biggest increase since 1990.

More bad news: medical care is becoming more expensive again after prices stabilized during the pandemic. The cost of care has jumped 5.4% over the past year, the biggest increase since 1993.

Prices also rose last month for almost everything else except for airline fares and used vehicles.

The only bad news on goods: Inflation-adjusted wages rose 0.2% in August to mark the second consecutive increase. However, real wages have fallen 2.8% over the past year.

Look forward: “Underlying inflationary pressures remained intense in the August CPI report, all but guaranteeing another outsized rate hike from the Fed next week,” said BMO senior economist Sal Guatieri. Capital Markets.

Market reaction: U.S. stocks opened sharply lower on Tuesday as investors reacted to a stronger-than-expected inflation reading for August. The Dow Jones Industrial Average DJIA,
fell more than 500 points, or 1.7%, shortly after the opening bell, while the S&P 500 SPX,
fell 2.2% and the tech-heavy Nasdaq Composite COMP
fell 2.9%, according to FactSet data.

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