Inflation came in faster than expected in August even as gas prices fell.

+

14

%

Inflation

+

12

+

10

+8.3%

in Aug.

+

8

+6.3%

excluding

food and

energy

+

6

+

4

+

2

0

2

’70

’80

’90

’00

’10

’20

+

14

%

+

12

Inflation

+

10

+

8

+8.3%

in August

+

6

+6.3%

excluding

food and

energy

+

4

+

2

0

2

1965

’70

’75

’80

’85

’90

’95

2000

’05

’10

’15

’20

+

14

%

+

12

Inflation

+

10

+

8

+8.3%

in August

+

6

+6.3%

excluding

food and

energy

+

4

+

2

0

2

1965

’70

’75

’80

’85

’90

’95

2000

’05

’10

’15

’20

Year-over-year percentage change in the Consumer Price Index

Source: Bureau of Labor Statistics

Inflation remained uncomfortably rapid in August despite a decline in gas costs as prices continued to soar across a broad array of other goods and services, evidence that the sustainable slowdown the Federal Reserve and White House have been hoping for remains elusive.

Prices rose 8.3 percent from a year earlier compared with 8.5 percent in July, a fresh Consumer Price Index report released Tuesday showed, a still-rapid pace of increase and not as much of a moderation as economists had expected. The disappointing data came even as falling gas prices pulled inflation lower, with rapidly rising costs for rent, health care, restaurant meals and goods such as furniture offsetting the relief consumers were feeling at the fuel pump.

Compounding the bad news, a core index that strips out gas and food to get a sense of underlying inflation trends accelerated by more than was expected.

For policymakers at the Federal Reserve, who have been raising interest rates to slow the economy and try to tame recent rapid inflation, the report was a fresh sign that continued aggressive action may be needed to wrestle them lower.

Economists said that the Consumer Price Index data cemented the case for a third straight, unusually large three-quarter-percentage-point Fed rate increase at the central bank’s meeting next week, and stocks swooned as investors began to speculate that officials could opt for an even more drastic full-percentage-point adjustment.

“Inflation remains hot, financial conditions have seen some improvement, and the labor markets are humming along,” Neil Dutta, head of U.S. economics at Renaissance Macro, wrote in a research note following the release. “If the goal is to slow things down and create some pain, the Fed is failing by its own standard.”

The Fed closely watches the core inflation gauge, making its rebound in August a point of particular concern. After cutting out food and fuel, consumer prices climbed by 6.3 percent in the year through last month, up from 5.9 percent in July and more than the 6.1 percent economists had projected.

Even looking at overall inflation, the report’s details offered plenty to worry about.

Two products that have been major drivers of inflation over the past year — gas and used cars — are now posting outright price cuts. But other goods and services are picking up in price so much that it is more than offsetting those declines. Prices climbed by 0.1 percent over the course of the past month amid rapid price increases for a broad array of products and services, including food away from home, new cars, dental care and vehicle repair.

The upshot is that inflation has plenty of underlying momentum.

Inflation Report Dampens Biden’s Attempts to Celebrate the Economy

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President Biden’s attempt to celebrate the economy was dampened by the inflation report.Credit...Sarah Silbiger for The New York Times

Hotter-than-expected inflation in August was unwelcome news for President Biden, who has sought to defuse Republican attacks over rising prices in the run-up to November’s midterm elections.

Mr. Biden and his aides have celebrated falling gasoline prices on a daily basis throughout the summer. They have helped inflation moderate from its high point earlier this year, though not enough to offset rising rent, food and other prices last month.

Even as he acknowledges the pain of rapid price increases across the economy, Mr. Biden has claimed progress in the fight against inflation, including with the signing last month of an energy, health care and tax bill that Democrats called the Inflation Reduction Act. On Tuesday, he sought to put a positive shine on the August data, calling them a sign of “more progress” in bringing down inflation.

“Overall,” Mr. Biden said in a statement released by the White House, “prices have been essentially flat in our country these last two months: that is welcome news for American families, with more work still to do.”

But polls continue to show inflation is hurting Mr. Biden and his party, as Democrats seek to retain control of the House and Senate. It looms as the top issue for voters in national opinion polls, and Americans say they trust Republicans more to handle inflation and the economy overall than Democrats.

There have been signs of hope for administration officials, both among consumers and companies. The National Federation of Independent Business reported on Tuesday that its Small Business Optimism Index rose in August as inflation anxiety eased, continuing a rebound from its depths earlier this year. The Federal Reserve Bank of New York reported on Monday that consumer inflation expectations were also falling.

Officials inside the administration and at the Federal Reserve say strong job growth and consumer spending this summer have put to rest fears that the country slipped into recession in the first half of the year.

The president sees those developments as signs that his policies are working to power the country through what remains a turbulent time in the global economy, and is seeking to claim credit.

Mr. Biden threw a belated celebration at the White House on Tuesday to mark his signing of the Inflation Reduction Act. At the event, he called the law “the single most important legislation passed in the Congress to combat inflation and one of the most significant laws in our nation’s history.”

On Wednesday, Mr. Biden will fly to the Detroit Auto Show to champion his policies to boost manufacturing and low-emission sources of energy.

But the country’s economic reality remains more muddled, as the inflation report underscored. Food prices are continuing to spike, straining lower-income families in particular. A possible railroad strike could disrupt domestic supply chains. The global economy is slowing sharply, and threats remain to the American recovery if European sanctions force millions of barrels of Russian oil off the global market in the months to come.

Most importantly — and perhaps most damaging for Mr. Biden and Democrats — Americans’ wages have struggled to keep pace with fast-rising prices, an uncomfortable truth for a president who promised to make real wage gains a centerpiece of his economic program. Inflation-adjusted average hourly earnings ticked up across the economy in August, the Labor Department said Tuesday, but remain down nearly 3 percent from a year ago.

Republicans were quick to criticize Mr. Biden after the report on Tuesday. “Every day, Americans endure Biden’s economic crisis,” said Representative Blaine Luetkemeyer of Missouri, the top Republican on the small business committee. “The Democrats’ inflation continues to drive up costs and leads more and more small businesses and families questioning their future.”

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Markets plunge on higher-than-expected inflation numbers.

Oct. 30

Oct. 31

4,140

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Data delayed at least 15 minutes

Source: FactSet

Stocks plummeted, U.S. government bond yields rocketed higher, and the dollar bounced, after fresh inflation data undermined investors’ bets over the slowing pace of inflation in August.

The S&P 500 slumped 4.3 percent on Tuesday, its biggest drop since the depths of the coronavirus pandemic in June 2020. Stocks had nudged higher in recent trading sessions, rising 1.1 percent on Monday and nearly 5 percent over the past week, as investors increasingly bet on the Fed’s ability to lower inflation by raising interest rates without slowing the economy to the point of tipping it into a severe downturn.

But higher-than-expected August inflation data released on Tuesday caught investors off guard, sending stocks lower and prompting a rapid re-pricing of how much the Fed may need to raise interest rates to rein in rising prices.

“We are not out of the woods yet,” said Luke Tilley, chief economist at wealth manager Wilmington Trust. “We can’t even see the edge of the woods from here.”

S&P 500

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%

Dow

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%

Nasdaq

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%

As of

Data delayed at least 15 minutes

Source: FactSet

Bankers and investors clung to expectations that even with a more rapid pace of interest rate increases, which slow the economy by raising borrowing costs for companies and consumers, the Fed may yet stick a so-called soft-landing, lowering inflation but avoiding a severe downturn. Yet there was also broad-based acknowledgment that the Fed’s task has been made harder in light of inflation remaining higher than expected.

“The longer the economy holds on, the longer household balance sheets can withstand these high prices, the more aggressive the Fed has to be in the future,” said Lauren Goodwin, an economist at New York Life Investments.

The two-year Treasury yield, which is sensitive to changes in the forecast path of interest rates, shot higher after the numbers were released, rising above 3.75 percent, a fresh high for the year.

Solid data on the labor market earlier this month pointed to the resiliency of the economy after several rate increases this year. Coupled with policymakers’ persistent message that they have yet to complete their task of lowering inflation through higher rates, investors had already come to expect another big rate increase, of three-quarters of a percentage point, when the Fed meets next week. For a time, some had bet on a half-point increase as the more likely option.

Following the inflation data, bets that the Fed would move aggressively when policymakers meet next week solidified, with some even starting to price in the possibility that the central bank could raise rates by a full percentage point, which would be its largest rate increase since 1984.

And the U.S. dollar, which had weakened for four days straight against a basket of currencies representing America’s major trading partners, swiftly strengthened on Tuesday, gaining 1.4 percent.

Inflation explained: The good, the bad and the uncertain.

Monthly changes in August

Piped utility gas service

+3.9

%

Apparel

+1.7

Motor vehicle maintenance

+1.7

Electricity

+1.1

Tobacco, smoking products

+1.1

Cereals, bakery products

+1.0

Motor vehicle insurance

+1.0

Nonalcoholic beverages

+0.9

Food away from home

+0.9

Rent of primary residence

+0.8

Hospital services

+0.8

Dairy and related products

+0.7

New vehicles

+0.6

Alcoholic beverages

+0.5

All items excl. food, energy

+0.5

Fruits, vegetables

+0.4

Meats, poultry, fish, eggs

+0.2

Medical care commodities

+0.2

Physicians’ services

+0.2

All items

0

–0.4

Used cars, trucks

–5.9

Fuel oil

–8.8

Airline fares

–12.2

Gasoline

Piped utility gas service

+3.9

%

Apparel

+1.7

Monthly changes

in August

Motor vehicle maintenance

+1.7

Electricity

+1.1

Tobacco and smoking products

+1.1

Cereals and bakery products

+1.0

Motor vehicle insurance

+1.0

Nonalcoholic beverages

+0.9

Food away from home

+0.9

Rent of primary residence

+0.8

Hospital services

+0.8

Dairy and related products

+0.7

New vehicles

+0.6

Alcoholic beverages

+0.5

All items excluding food and energy

+0.5

Fruits and vegetables

+0.4

Meats, poultry, fish and eggs

+0.2

Medical care commodities

+0.2

Physicians’ services

+0.2

All items

0

Used cars and trucks

–0.4

%

Fuel oil

–5.9

Airline fares

–8.8

Gasoline

–12.2

July-to-August changes in a selection of categories of the Consumer Price Index

Source: Bureau of Labor Statistics

Inflation in the United States has been cooling on an annual basis over recent months as a result of falling gasoline prices, but economists are looking for more evidence that the slowdown in price increases will become widespread and pronounced.

So far, that has yet to happen — and in fact important signs point in the other direction. Price increases across an array of products and services, from couches to restaurant meals and rent, continued to climb in August even as consumers received relief at the gas pump.

That’s likely to leave policymakers searching for hints that a broader decline could be coming. As they do, here are a few positive developments, a couple of worrying ones and a big, looming uncertainty that analysts will be paying close attention to in the months ahead.

Good News

  • Gas and other commodities. Falling prices at the gas pump have been pulling down annual inflation, and some food commodity prices have also been easing, which could eventually seep through to retail prices. That would be good news for consumers, who tend to be sensitive to transportation and grocery costs. But for now, food costs continue to climb sharply as commodity cost spikes from earlier this year continue to feed through to grocery aisles.

    For Federal Reserve officials, lower gas and food prices would be a welcome, but not decisive, development. Because those costs jump up and down, central bankers tend to look past them when trying to get a sense of where inflation is headed.

  • Cars and other physical products. A more meaningful positive development is taking place in goods prices, some of which are showing early signs of cooling off. Notably, price increases for used cars, which helped drive the pop in inflation that began last year, are beginning to pull back — falling 0.1 percent over the past month.

    Goods inflation might continue to ease because consumers are shifting their spending away from products they snapped up during the pandemic and back toward services, like restaurant dinners and vacations. And it could be helped by a clearing up in supply chain issues, which have plagued producers for more than a year but have shown recent signs of abating, though they are not fully back to normal.

Bad News

  • Services tied to the labor market. Even as price increases for some goods ease, services prices — including the cost of eating out or hiring child care — have been picking up quickly. The cost of food away from home climbed by an unusually rapid 0.9 percent between July and August, for instance. Big increases in such service categories could be poised to continue, because their prices are closely linked to wages, which have been climbing notably as a result of a strong job market with low unemployment and worker shortages that span many fields.

  • Rent. The most important service category is rent-related costs, which count for nearly a third of overall inflation and which continued a steep ascent in August. For the time being, economists expect housing costs to continue increasing sharply. There are too few apartments to go around, especially as renters shy away from buying homes amid rising mortgage rates. And a big run-up in rents over the past year is still slowly feeding into inflation.

Uncertainties

  • War and disruption risk. Economists have repeatedly predicted that inflation was about to decelerate only to have those expectations scuppered. With war in Ukraine still stoking uncertainty about supply chains and commodity markets, central bankers may be slow to declare victory on inflation. And even if price increases begin to pull back, a key question is: How much will inflation slow?

    “The bigger question for the Fed is not: Has inflation peaked? It’s: What’s the destination?” said Aneta Markowska, chief financial economist at Jeffries. She thinks that without a notable slowdown in economic growth, it will be difficult to get annual price gains back under 4 percent. That would be far higher than the 2 percent annual average that the Fed aims for.

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Rapidly rising rents could pose a problem for the Fed.

One reason to worry that inflation won’t abate anytime soon: rapidly rising rents.

The Labor Department’s measure of rent was up 6.7 percent in August from a year earlier, the fastest rate since the mid-1980s. And the increases are accelerating: Over the past three months, rents have risen 2.2 percent, the equivalent of a 9.2 annual rate.

Those figures might sound low to anyone who’s signed a new lease lately, given that tenants in many cities are facing double-digit percent rent increases. That’s partly because the Labor Department’s measure tries to capture how fast rents are rising for everyone, not just people signing new leases.

That approach means that the rent price index usually moves slowly — but once it starts moving, it tends to keep going. And because housing is such a big component of total spending, if rents keep rising quickly, it will be hard for the Fed to bring overall inflation down to its 2 percent target.

The acceleration in rents reflects a broader shift in inflation dynamics in recent months. When prices first began rising rapidly last year, the problem was concentrated in the goods sector, reflecting supply chain disruptions that made it hard for automakers and other manufacturers to meet strong demand. More recently, goods inflation has begun to ebb, but that decline is being offset, at least in part, by faster inflation in services, including housing.

Numbers from private data sources have shown some moderation in the prices landlords are asking for available apartments in recent months, which should eventually filter through to the government’s rent index. But there are also forces pushing in the opposite direction. Higher interest rates are making it harder for people to buy homes, which is driving up demand for rental units and keeping prices high. Rents also tend to track wages, which have continued to rise as the labor market has remained strong.

A jump in grocery prices is pinching consumers.

Food prices continued to rise in August, increasing by 0.8 percent from July, and fueling a larger than expected increase in inflation last month.

Food prices in August were up 11.4 percent from the same month a year ago. Food inflation in the United States has risen to its highest level in more than 40 years this year, driven by trends both within the United States and abroad. Farmers and grocers have had to pay higher prices for gasoline, worker wages and packaging, which they have in turn passed on to their consumers.

In August, prices for groceries rose 0.7 percent, while the prices for restaurant meals accelerated more quickly, rising 0.9 percent from the month before. Cereals and bakery products were up 1.2 percent from July. Meats, poultry, fish and eggs rose 0.5 percent.

Among the foods with the biggest price increases last month were white bread, doughnuts, hot dogs, potatoes, tomatoes and canned fruits.

In the last year, the cost of eating at home has grown 13.5 percent, the sharpest increase since 1979. The cost of dining out is up 8 percent from August 2021.

A bout of bird flu earlier this year made chickens and eggs scarce, driving up the prices of both. Droughts in key agricultural regions, like the Western United States and in Brazil, have pushed up the prices of foods like grains and coffee, as has the Russian invasion of Ukraine, a major producer of wheat and sunflower oil.

More turmoil could be in store for global food markets. Last week, Russian President Vladimir V. Putin sowed fresh doubt about the future of arrangements that have allowed grains to be exported from Ukraine, pushing up the price of wheat globally. Last Thursday, India also banned exports of one kind of rice and put a tax on others, in an effort to shore up supplies and fight domestic inflation.

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Gas prices have fallen for 91 straight days, relieving some inflationary pressure.

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The price of gasoline fell steadily in August but is still higher than it was a year ago.Credit...Hiroko Masuike/The New York Times

The price of gasoline continues to fall steadily, easing pressure on American consumers as the cost of filling a tank continued to tumble from record levels reached earlier in the summer.

Gas prices fell 10.6 percent in August, which helped moderate still-sky-high inflation, Tuesday’s Consumer Price Index report showed.

The energy index, which tracks gasoline and electricity among other energy sources, dropped 5 percent last month, as electricity and natural gas prices rose.

After peaking at $5.02 in June, gasoline prices have dropped for 91 straight days, and the national average stood at just over $3.70 a gallon on Tuesday, data from AAA show. But analysts point to a few reasons this streak of declines is unlikely to continue.

Because they’re determined by oil prices, gasoline prices are also susceptible to a wide range of challenges, like hurricanes that knock out drilling in the Gulf of Mexico and efforts to punish Russia for its invasion of Ukraine by curbing its ability to sell crude on the global market.

While gas prices are down, the overall energy index still remains up 23.8 percent over the 12 months that ended in August. Electricity prices alone jumped 15.8 percent, representing the largest 12-month increase since August 1981, the inflation report said. The jump in electricity prices is largely attributable to the high cost of natural gas, said Laura Rosner-Warburton, an economist at MacroPolicy Perspectives.

As winter approaches, other fuel prices could influence inflation data. The cost of heating a home with natural gas, the most common source of home-heating fuel in the United States, is expected to jump more than 25 percent from last year, to $952 for the six months from October through March, according to the National Energy Assistance Directors Association.

“You would expect that a hard winter could create a significant increase in demand in price of natural gas,” said Bryan Benoit, U.S. national managing partner of energy at Grant Thornton. “And then of course all of this is further exacerbated by what’s going on with the war in the Ukraine.”

What economists and analysts say about what the data means.

Wall Street let out a collective groan on Tuesday as fresh inflation data showed that underlying price pressures sped up by more than expected in August, a piece of unambiguously bad news.

Rapidly climbing “core” prices — which strip out volatile fuel and food costs to get a sense of the underlying trend — are evidence that consumers are paying more for rent, dinners out and furniture. They also suggest that the Federal Reserve, which is raising interest rates to cool the economy and try to get inflation under control, may have to do more. The Fed is widely expected to make a three-quarter percentage point rate increase — what analysts often call 75 basis points — when it meets next week.

Here is how some experts interpreted the fresh Consumer Price Index data:

  • “Ouch. Unexpectedly big increases in a broad array of unrelated components,” wrote Ian Shepherdson of Pantheon Macroeconomics, noting that vehicle repair, tobacco, new vehicle, furniture and dental costs all rose. Although he still thinks inflation is about to slow down, it is clearly not meaningfully happening yet.

  • “Inflation remains hot, financial conditions have seen some improvement, and the labor markets are humming along,” noted Neil Dutta of Renaissance Macro. “If the goal is to slow things down and create some pain, the Fed is failing by its own standard.”

  • “The August C.P.I. is a reminder that we don’t always get what we want,” wrote Mark Hamrick of Bankrate. “The prices for necessities continue to fuel this fire, including shelter, food, and medical care. The substantial decline in gasoline prices is noteworthy but doesn’t address the overall problem with inflation.”

  • “Overall, inflation readings remain unacceptably high for policymakers,” wrote Rubeela Farooqi of High Frequency Economics. “Coupled with a labor market that is still strong, the data seal the deal for another aggressive, 75-basis point, rate hike next week.”

  • “Headline inflation has peaked but, in a clear sign that the need to continue hiking rates is undiminished, core C.P.I. is once again on the rise, confirming the very sticky nature of the U.S. inflation problem,” wrote Seema Shah of Principal Global Investors. “Until the Fed can tame that beast, there is simply no room for a discussion on pivots or pauses.

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