Inflation Surge Driven by Soaring Gas Prices: What You Need to Know

Gas Price Spike Causes Inflation Rise in August

Gas prices experienced a sharp increase in August, resulting in a rise in inflation. However, most other costs saw a more modest growth rate, indicating a general cooling of consumer price increases. The latest data from the Labor Department reveals that the consumer price index increased by 3.7% in August compared to the previous year, up from a 3.2% annual pace in July. On the other hand, core prices, which exclude the volatile food and energy categories, rose by 4.3% in August, down from 4.7% in July. This is the smallest increase in almost two years and falls short of the Federal Reserve’s 2% target.

Despite the significant rise in gas prices, they have since stabilized. The average nationwide price at the pump, according to AAA, remained unchanged at $3.84 from the previous month. The decline in core prices, although seemingly contradictory, adds to the optimism surrounding the control of inflation. The Federal Reserve closely monitors core prices since they serve as a better indicator of future inflation trends. Furthermore, the latest figures suggest that the Fed may choose to forgo an interest rate hike at its upcoming meeting.

Economists predict that inflation will continue to decline throughout the rest of the year, despite the potential impact of higher gas prices. This decline is expected as the cost of new and used cars, rents, and furniture decrease. Alan Detmeister, an economist at UBS and former staff economist at the Fed, stated that “The longer-run trend is coming down.” He also highlighted that while there may be month-to-month fluctuations, the overall trajectory is positive. Cooling inflation could potentially lead to a rare “soft landing” for the economy, characterized by a slowdown in growth and hiring that brings down price growth without causing a deep recession.

Federal Reserve officials are becoming increasingly open to the idea that inflation is under control. However, Fed chair Jerome Powell acknowledged last month that inflation levels were still “too high.” In his notable speech in Jackson Hole, Wyoming, Powell stated that the Fed would proceed “carefully” with any future rate hikes. This was seen by many economists as a hint that the Fed may choose to skip the rate increase at its September 19-20 meeting. The Fed has raised its benchmark interest rate 11 times in the past 12 meetings, bringing it to around 5.4%, the highest level in 22 years. After keeping it unchanged in June, the rate was increased by a quarter-point in July. According to CME’s FedWatch, investors currently only see a 7% chance of a rate hike next week. However, they have already factored in a 38% chance of an increase at the Fed’s subsequent meeting in November. (Read more inflation stories.)