Key US inflation measure remains stubbornly high

The Federal Reserve’s preferred inflation gauge remained elevated in new data released on Friday, further evidence that the central bank is contending with a stubborn problem as it tries to choke off the worst inflation in four decades.

The Personal Consumption Expenditures inflation measure, which is produced by the Commerce Department and is the measure the Fed officially targets as it tries to achieve 2 per cent annual inflation, climbed by 6.2 per cent in the year through August. While that was a slowdown from 6.4 per cent in July, it was higher than the 6 per cent economists expected.

The details of the report were even more concerning. While price increases have been moderating somewhat on an overall basis, that is partly because gas prices have been declining. After stripping out volatile food and fuel prices to get a sense of underlying inflationary pressures, the index climbed 4.9 per cent in the year through August, an acceleration from 4.7 per cent the month before. And on a monthly basis, the core index picked up by 0.6 per cent, a rapid pace of increase that was the fastest since June.

The data underlined what a rocky road the Fed faces as it tries to guide the U.S. economy toward slower inflation. Consumers continued to spend in August, the report also showed, suggesting that the economy still has momentum even as central bankers raise interest rates to try to cool demand, slow hiring and eventually weigh down inflation. Because growth has been resilient, the Fed has become steadily more aggressive in its efforts to constrain spending and temper inflation.

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“Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out,” Lael Brainard, the Fed’s vice chair, said in a speech on Friday. She later added that “we are committed to avoiding pulling back prematurely.”

The Fed has lifted interest rates five times this year, including three unusually large three-quarter point rate increases, and Ms Brainard reiterated that it will need to restrict the economy for some time to make sure it has brought inflation back under control. But she also emphasised that future rate increases will depend on incoming data, suggesting that the Fed will keep an eye on the economy as it slows down and calibrate its moves accordingly.

Economists remain hopeful that healing supply chains, a slowing housing market, cooling consumer demand and a moderating labour market will combine to pull inflation lower in the months ahead. But Russia’s war in Ukraine poses a constant risk to the global supply of food and oil, and industries including automobiles remain severely disrupted. Rents and other service costs have been rising sharply, and labour shortages spanning many industries have pushed wages up, which could feed through to higher prices.

Those factors have informed the Fed’s decision to stage its most aggressive campaign in decades to bring inflation under control. As fewer people buy homes or expand businesses, the effect should trickle through the economy and labour market, slowing demand and bringing it back in line with supply.

Still, the Fed’s war on inflation comes at a risk. Policy takes time to work, and the Fed is moving so quickly in its bid to choke off inflation that it isn’t waiting to see the effects of its moves fully take hold before ushering in new ones. Other central banks are also raising rates, which could combine with turmoil from the war in Ukraine and other factors to sharply slow the world’s economy.

“The Federal Reserve’s policy deliberations are informed by analysis of how US developments may affect the global financial system, and how foreign developments in turn affect the US economic outlook and risks to the financial system,” Ms Brainard said on Friday.

As higher rates play through the economy to slow spending and weaken the labour market, the central bank could push up unemployment and even cause a painful recession. While officials are hoping that outcome can be avoided, they admit that the chances of averting a bad outcome have grown slimmer as inflation has remained persistently and painfully high and their policy path has become more aggressive.

While a recession would be bad for Americans, costing them jobs and likely slowing their wage gains, today’s inflation is also a burden on many households. Families are finding that it is harder to afford everything from housing to clothing and food, which is a particular burden for consumers with lower incomes who have less room to cut spending from their budgets or to substitute to cheaper options.

The risk, for the Fed, is that people and businesses might get used to today’s rapidly climbing prices. If that happens, they might adjust their behaviour accordingly, with workers asking for faster pay increases and businesses passing those higher labour costs along to customers in the form of higher prices. If that were to happen, inflation could become a self-fulfilling prophesy.

Fortunately, measures of inflation expectations seem to be relatively stable, and have even declined somewhat in recent months. But Fed officials have been clear that after more than a year of rapid price increases, they do not want to take that stability for granted.

“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Jerome Powell, the Fed chair, said at his news conference on September 21st. This article originally appeared in The New York Times.