Inflation Higher than Expected: August Report
Inflation was up 3.7 percent year-over-year through August, up from 3.2 percent in July – a monthly increase of 0.6 percent. The core inflation, a measure that excludes energy and food prices, was up 4.3 percent over the twelve months through August, down from 4.7 percent in July. The monthly core inflation in August was 0.3 percent – a bigger increase than economists anticipated.
The increase in headline CPI was due to a spike in gas prices. As to the core CPI increase, the culprits were car insurance and airline fares, among other services. The Fed officials have been careful in setting expectations regarding reining in inflation, despite the notable slowdown this Summer. As the most recent numbers demonstrate, the job is not over yet, and the Fed officials are wise to remain cautious.
The Fed is convening next week to decide whether another hike is necessary. However, another hike is not expected as evident in the table below showing the current market probabilities. It takes time for higher interest rates to have a full impact on the economy and slow down inflation. The Fed needs to be precise in their calculations so that higher interest rates slow down the economy just enough to bring down inflation and not cause a recession.
