Economists expect the uptick because of rising gas and food costs — temporary factors that won’t surprise economists. Plus, prices from August are being compared to last year, when inflation was high but slowly ticking down. That means that “base effects,” as they’re known, matter — if price increases were falling a year ago, they can look like they’re rising more now in comparison.
Yet there’s been notable progress since summer 2022, when the consumer price index peaked at 9.1 percent. Policymakers are growing more optimistic that the economy can cool down without tipping into a recession. But threatening the path is the thorny reality that the remaining, persistent sources of inflation will be tricky to stamp out.
“There are unique supply problems going on, globally, and the Fed can’t do anything about it,” said Joe Brusuelas, chief economist at RSM. “The Fed will have to look right through the volatility.”
Inflation has come down for multiple reasons over the past year. Supply chains have cleared their backlogs, making it easier for consumers to get everything from computers to couches. The energy surge that followed Russia’s February 2022 invasion of Ukraine has abated. And the Federal Reserve has managed to get borrowing costs high enough to where they meaningfully slow the economy, especially in interest-rate-sensitive sectors like housing.
But that doesn’t mean prices themselves have returned to pre-pandemic levels, which experts say is a main reason many Americans feel so down on the economy. That’s especially the case since some of the remaining sources of inflation affect key staples — like food and rent — that continue to dog the budgets of families and businesses nationwide.
The inflation report will likely show August’s rising gas prices as Russia and Saudi Arabia cut supply. Food prices, too, are feeling the pressures from the war in Ukraine and its impact on grain supply chains.
Rent, meanwhile, continues to be a major driver of overall inflation. There are clear signs that rent costs are easing from their pandemic highs, and the hope is that prices will keep cooling as roughly 1 million multifamily rental units come online later this year and next. But it will take time for that new supply to filter through the entire market, and any effect is unlikely to show up in official inflation reports for at least a few more months.
Through it all, the economy continues to show remarkable strength. The labor market is still growing but at more sustainable levels, and the unemployment rate is at a tight 3.8 percent. Crucially, consumers are still spending — on new cars and concert tickets alike — keeping the economy and job market churning. Put together, that has economists growing more optimistic that there won’t be a recession. Goldman Sachs last week cut the chances of a downturn to 15 percent over the next 12 months, from a previous forecast of 20 percent.
The latest inflation data will get a close study from officials at the Federal Reserve as they debate how much higher to raise interest rates and how long to keep pressure on the economy. After scrambling to hoist borrowing costs over the past 18 months, policymakers are in a new phase. Their message now is that they can afford to be patient and take stock of incoming information on prices, jobs, wages, consumer spending and economic growth, while deciding what to do about rates.
For now, markets largely expect the Fed will hold rates steady when it convenes later this month. That would keep the Fed’s benchmark interest rate, known as the federal funds rate, at a level between 5.25 and 5.5 percent. Still, the door is open for another quarter-point hike before the end of the year, depending on how the data unfold.
During a closely-watched speech last month, Fed Chair Jerome H. Powell made clear there is more ground to cover to fight inflation.
“We will need price stability to achieve a sustained period of strong labor market conditions that benefit all,” Powell said. “We will keep at it until the job is done.”
In Sacramento, Shay Aziz feels the sting of high gas and rent prices at her company, Valley Courier Xpress. Her pricing for deliveries takes all sorts of things into account, like weight, driver pay and the kind of vehicle used to complete a trip. But gas costs and the pressure she feels to keep wages high enough to retain her small team of drivers, make it hard to see a way around raising prices.
She and her husband have thought about growing the company to the Bay Area, but rent and financing costs would be too expensive. For now, Aziz said that means figuring out the right timing for raising prices, and holding firm when customers call for an estimate “and always comment, ‘really?’”
“They don’t understand, because they’re thinking about how much they can afford. Not about me and how much I know about my business,” Aziz said. “They say, ‘can you go to San Francisco for $100?’ That’s not even going to cover the gas.”
