In August, inflation rose to 3.5% in Fed’s preferred measure.
Inflation Rises to 3.5%: Bad News for the Economy and Biden Administration
The latest report from the Bureau of Economic Analysis reveals that inflation has ticked up to 3.5% for the year ending in August. This measurement is based on the personal consumption expenditures price index, which is the preferred gauge of the Federal Reserve. The report also indicates that inflation has slightly increased in the past month, despite the Fed’s efforts to slow it down by raising interest rates.
This news is concerning for both the economy and the Biden administration, as it shows that inflation is still above the central bank’s target of 2% annual price growth. The administration has been trying to highlight positive economic developments, such as low unemployment and solid economic growth, as evidence that their economic agenda is successful. However, the persistent inflation challenges their narrative.
Core PCE Inflation Falls to 3.9%
One measure of inflation, known as core PCE inflation, which excludes energy and food prices and is generally less volatile, has fallen to a 3.9% year-over-year rate. While the personal consumption expenditures price index is the Fed’s preferred gauge, the consumer price index is more commonly cited. According to the CPI, inflation was at 3.7% in August.
Despite the Fed’s efforts to tighten monetary policy, inflation has significantly decreased from its peak last summer. Surprisingly, other economic indicators, such as gross domestic product growth, have remained positive. The Bureau of Economic Analysis reported that the economy grew at a 2.1% annual rate in the second quarter of this year, which is close to the pace of the previous quarter.
However, there are signs of a slowdown in consumer spending, with an annual rate of 0.8% in the second quarter. This could be a result of the higher interest rates. Many economists predict that these rates will eventually impact the broader economy and potentially lead to a recession in the future.
PNC Chief Economist Gus Faucher stated that PNC expects a mild recession to begin in the second quarter of 2024 due to the ongoing impact of higher interest rates. However, he believes that the recession will be relatively mild thanks to strong consumer balance sheets and a tight labor market that will discourage layoffs.
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How does inflation pose challenges for businesses, particularly small businesses, and what can be done to mitigate these challenges?
And the Biden administration. Inflation at 3.5% indicates a rise in the overall price level of goods and services over the past year. This erodes the purchasing power of consumers and puts a strain on the economy.
One of the key issues with rising inflation is the impact on consumers. As prices increase, people’s budgets stretch thinner. Essential goods and services become more expensive, making it challenging for individuals and families to meet their basic needs. High inflation also reduces the real value of wages, putting additional financial stress on households.
For businesses, inflation can pose several challenges. Manufacturers and producers face higher costs for raw materials and inputs, which can eat into their profit margins. These increased costs often get passed on to consumers in the form of higher prices. Small businesses, in particular, may struggle to absorb these rising costs, potentially leading to layoffs or closures.
Inflation can also have broader implications for the economy as a whole. It creates uncertainty and makes it difficult for businesses and investors to plan for the future. This can lead to a decrease in investment and slower economic growth. Additionally, inflation can negatively impact the value of the dollar, making imported goods more expensive and potentially leading to a trade imbalance.
The Biden administration is also faced with the challenge of addressing inflation. Higher inflation can be seen as a failure of economic policy and can undermine public confidence in the government’s ability to manage the economy. It puts pressure on the administration to take action and implement policies that can bring inflation under control.
The Federal Reserve plays a critical role in managing inflation. The Fed has been raising interest rates in an attempt to slow down inflation. By increasing interest rates, the Fed aims to make borrowing more expensive, which can reduce spending and ultimately decrease demand for goods and services. However, it seems that these efforts have not been entirely effective in curbing inflation.
Moving forward, it is crucial for policymakers to closely monitor the inflation situation and take appropriate actions to mitigate its impact. This may involve a combination of fiscal and monetary policies, such as tightening government spending and implementing measures to control price increases. It is also important for the Biden administration to communicate its plans and strategies to the public to build trust and confidence in its ability to address the issue.
In conclusion, the rise in inflation to 3.5% is a concerning development for the economy and the Biden administration. It puts pressure on consumer purchasing power, poses challenges for businesses, and creates uncertainty for the overall economic outlook. Addressing and managing inflation will require careful policy decisions and effective communication to restore stability and confidence in the economy.
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