In August, prices were up 8.3% from the year before and up 0.1% from July. Headline inflation is falling amid a persistent decline in gasoline prices in the United States.
However, less volatile prices reversed a declining trend and increased slightly in August. Core inflation, in this case defined as all prices less food and energy, rose 0.6% in August from July and is up 6.3% from the year before.
Prices that have been especially volatile in the past two years are on the decline. Gasoline prices fell 10.6% in August, and prices for new and used vehicles are stabilizing, albeit at a high level. Core inflation remains elevated despite these declines, indicating that headline shocks are fading as the main inflation culprit. Prices for shelter and medical services, for example, were up 6.2% and 5.6%, respectively. Increased prices have seeped through the economy.
The fall in headline inflation coincided with falling consumer expectations of price increases. Both one-year and three-year inflation expectations dropped in the New York Fed’s Survey of Consumer Expectations. Though elevated, the expectations have not become completely unanchored.
This is mostly good news for the Fed and Jerome Powell ahead of next week’s rate decision. The inflation tide is sinking, and expectations are falling. But, backing down is still not an option, especially considering the rise in core prices. Jerome Powell and other officials have made it clear that rate hikes will not stop until inflation turns a corner.
This is in part due to the very tight labor market. Despite recent months’ decreasing job openings levels, vacancies still far outsrip the number of unemployed. The level of unemployment needed to bring inflation down to a targeted level is still unclear. But, recent papers have estimated that the tradeoff will be much more severe than the Fed hopes.
Striking a delicate balance between consumer expectations and cooling the labor market continues as the Fed’s top priority moving forward. The worst of this inflationary period may be behind us but we have yet to emerge from the woods.
