On Sept. 13, the Labor Department reported that the Consumer Price Index (CPI) rose 8.3% in August over the past 12 months. The core CPI, which excludes energy and food prices, increased 6.3% from the previous year. The high core inflation number indicates that we suffer from widespread price increases on a broad front. Examples of the increases include housing, medical care, and new and used vehicles. These figures indicate that inflation will remain a problem for some time.

Diane Swonk, chief economist at KPMG, said, “This is what the Fed is worried about — the persistence of inflation even as demand is easing. This report is a nightmare. This puts a one-percent rate rise definitely on the table.”

Mark Zandi, chief economist at Moody’s Analytics, said, “The core inflation numbers were hot across the board. The breadth of the strong price increases, from new vehicles to medical care services to rent growth, everything was up strongly.”

The stock market reacted badly to the news. It was the worst day since June 11, 2020. All 11 Sectors of the S&P 500 declined. The Dow fell 3.9%. The S&P 500 dropped 4.9%. The Nasdaq Composite slid 5.2%.

An article from the Wall Street Journal, “Where Prices Rose and Fell in August,” highlights the following key items:

  • Energy: Over the past year, gasoline prices are up by 27.1% and electricity 15.8%. Much of the electricity price increases have been driven by the increase in the price of natural gas.
  • Food: Groceries have increased by 13.5% over the past year, the fastest rate since March 1979. The war in Ukraine has caused cereal and bakery prices to increase 16.4% over the past year.
  • Housing: Shelter costs, the largest component of the consumer price index, have increased 6.2% over the prior 12 months.
  • Education: Educations costs — including tuition, fees, day care and other related services — were up 3.7% from a year earlier.
  • Motor Vehicles: The cost of new cars and trucks rose by 10.1% over the prior 12 months.
  • Services: Services have increased 6.2% year over year.

Inflation began surging last year when the U.S. economy started to recover from the pandemic. Supply chain challenges and Russia’s invasion of Ukraine led to higher food, energy and commodity prices. Consequently, many economists and policymakers erroneously felt that once supply chain disruptions lessened and gas prices eased, overall price pressures would decline. The August consumer price index numbers highlight that inflation is more persistent and entrenched.

In an effort to tame the multi-decade highs in inflation, the U.S. Federal Reserve increased interest rates by 75 basis points at its Sept. 21 meeting. Federal Chairman Jerome Powell stated in prepared remarks that “we are focused on… getting inflation back down to 2%. We can’t fail to do that. I mean, if we were to fail to do that, that would be the thing that would be most painful for the people that we serve. So, from now on, that has to be our overarching focus.”

The Fed is concerned that companies now have the ability to pass along higher costs and markups to their customers. They also see a very tight labor market where job openings are twice as large as unemployed workers. To stop inflation, over the next year the Fed might need to increase their benchmark federal funds rate to 4.5%. Such an increase raises the risk of a recession.

In late August, Federal Reserve Chairman Jerome Powell said that “while rate increases would bring down inflation, they will also bring some pain to households and businesses.” Powell is focused on bringing down inflation to prevent it from becoming entrenched as it did in the 1970s.

Originally published in the Sarasota Herald-Tribune