August saw a rise in inflation to 3.7%.
Inflation Rises to 3.7%: Bad News for Biden and the Fed
Inflation has increased to a 3.7% rate for the year ending in August, marking the second consecutive increase after a full year of declines.
This uptick, reported on Wednesday by the Bureau of Labor Statistics in an update to the consumer price index, brings some bad news for President Joe Biden and the Federal Reserve. Biden has been working to reassure voters that he is curbing price pressures, while the Fed has been desperately trying to bring down inflation over the past year.
On a month-to-month basis, inflation rose 0.6%, aligning with expectations.
It’s important to note that the major factor driving up the headline number was gasoline prices. Gas prices rose last month, accounting for more than half of the overall increase. Gasoline prices alone surged over 10% from July to August, pushing the overall CPI higher.
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The Federal Reserve has been hiking interest rates for over a year, and while annual inflation did tick up slightly last month, it has significantly fallen since the tightening cycle began in earnest last March. The central bank’s target rate now stands at 5.25% to 5.50%, with the most recent rate hike potentially being the last of the Fed’s tightening cycle. Fed officials will carefully analyze the details of this latest report ahead of their next meeting later this month.
“The Federal Reserve is poised to hold interest rates steady at their meeting next week, but there are still concerns within this CPI report – gasoline prices, motor vehicle insurance, maintenance and repair – that the Fed won’t dismiss the idea of an additional interest rate hike before year-end,” said Greg McBride, chief financial analyst at Bankrate.
Additionally, “core inflation,” which excludes volatile food and energy prices, fell to 4.3% in the year ending in August. Overall, core inflation has been trending downward this year, which is a positive sign for the Fed.
Soaring inflation has negatively impacted households in recent years and has undermined support for Biden and his economic agenda. Republicans have used the higher prices as ammunition to attack the administration, blaming spending legislation, particularly pandemic-era relief spending, as drivers of inflation.
Democrats, on the other hand, argue that the larger inflationary pressures stem from the supply side rather than the demand side. They also point out that many other developed countries are facing high or even higher inflation rates than the U.S.
Nevertheless, a recent string of positive economic data has allowed the Biden administration to shift its messaging campaign towards highlighting the bright spots in the economy. The White House has branded these developments as proof of “Bidenomics” in action.
One particularly encouraging aspect is the robust labor market, which has defied expectations for months despite rising interest rates.
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The latest employment report for the month of August, released last week, revealed that the economy added 187,000 jobs, surpassing the expectations of most economists. However, the report was mixed as the unemployment rate also increased.
While the overall economy has remained remarkably resilient despite the rate revisions, consumers have felt the impact through rising mortgage rates, making housing more unaffordable and slowing down the previously red-hot housing market.
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