Core inflation ticked up slightly in August as measured by the gauge favored by the Federal Reserve, raising some concern as the central bank works to tighten monetary policy.
Core inflation, which strips out energy and food prices, rose to a 4.9% annual rate, as tracked by the personal consumption expenditures price index, which is more than forecast and higher than July’s 4.7%.
Headline inflation, meanwhile, slowed from 6.4% to 6.2% on an annual basis from July to August, according to the data released by the Bureau of Economic Analysis Friday morning. The personal consumption expenditures price index rose 0.3% just in the month of August.
“Inflation was slightly higher than expected in August, keeping the Fed on course for further aggressive rate hikes near-term,” said Bill Adams, chief economist for Comerica Bank.
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Republicans have used inflation as a cudgel to attack Democrats and the Biden administration. Following Friday morning’s report, Rep. Kevin Brady (R-TX), ranking member of the Ways and Means Committee, described inflation as “another crushing blow for families.”
“Core inflation went up far beyond expectations,” Brady said during a phone call with reporters.
Economists have been closely scrutinizing every inflation and employment report to see how the central bank’s interest rate hiking cycle has been affecting the country’s economic situation.
The Fed hikes rates to dampen demand, which then slows the economy as a result. There are fears that the Fed will overcompensate in order to drive down inflation and knock the economy into a recession.
Those concerns have been even more pronounced following other recent inflation reports. The August consumer price index report, which is more commonly used to gauge inflation in the United States, came in hotter than expected this month, clocking in at 8.3% on an annual basis.
The day the news broke of the report, markets had their worst day since around the start of the coronavirus pandemic more than two years ago, showing just how panicked investors are getting that the Fed will not be able to successfully pull off a “soft landing” — that is, slashing inflation while avoiding a recession.
As a result of the stubborn inflation, the Fed has become ever more hawkish throughout the year. Following the CPI report, the central bank conducted a monster rate hike to the tune of three-quarters of a percentage point, or 75 basis points. It was the third such increase in just a matter of four months.
The markets have been responding to the bigger hikes and more persistent inflation.
U.S. stocks have been plummeting since the CPI report, with the Dow Jones Industrial Average tumbling by nearly 10% this month alone. The S&P 500 is off by 10.5% for the month, and the tech-heavy Nasdaq composite has shed nearly 11.5% of its value during the same period of time.
The selloff is only increasing fear that a recession is in store.
GDP fell at a 0.6% annualized rate in the second quarter, a final estimate from the Bureau of Economic Analysis showed Thursday morning. The updated report confirmed the second-straight quarter of declining inflation-adjusted GDP — a situation commonly used to define a recession. GDP tumbled at a 1.6% rate in the first quarter.
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One glimmer of hope for the economy is that, despite the rate hikes, the labor market has shown resiliency. The economy added 315,000 jobs in August, and the unemployment rate ticked up slightly to 3.7%, near a five-decade low and around the ultralow level it was at right before the pandemic.
The Fed will be closely weighing the PCE, CPI, and employment reports prior to its next meeting in November, when it will decide to what extent it will hike rates.
