Inflation is slowing but probably not enough to deter Fed tightening

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Diving brief:

  • Inflation fell more than expected last month but held near a 40-year high, likely prompting the Federal Reserve to continue its most aggressive stimulus withdrawal since the 1980s.
  • The consumer price index (CPI) rose 8.5% in July from the same month last year after rising 9.1% on an annual basis in June, the Department of Labor said on Wednesday. Falling prices for used cars, clothing, air fares and energy—particularly a 7.7% drop in gasoline prices—trimmed gains in other goods and services.
  • Inflation remained elevated in the CPI components particularly critical to consumers. Food prices jumped 10.9% from July 2021, the biggest rise since 1979. Housing costs, the CPI’s dominant service category, rose 5.7%, the biggest increase since 1991.

Overview of the dive:

Fed Chairman Jerome Powell and other policymakers have said in recent weeks that the central bank needs a few months of easing price pressures before it begins to ease its policy tightening and believe that the inflation is falling towards its target of 2%.

The central bank is “far, far, far from declaring victory” in its fight against inflation, Minneapolis Fed Chairman Neel Kashkari predicted on Wednesday, while hailing lower price gains last month.

Policymakers ‘said we have a duty to reach 2%’, Kashkari said during a round table organized by the Aspen Institute. “We are united in this commitment, and we will do what we have to do to bring inflation down to 2%.”

Disruptive price pressures could persist well into 2023, Fed Governor Michelle Bowman said in a speech on Saturday. “I see a significant risk of high inflation next year for basic necessities, including food, shelter, fuel and vehicles.”

Referring to the Fed’s decision in July to raise the main interest rate by 75 basis points for the second consecutive month, Bowman said: “Similar sized increases should be on the table until we see inflation come down consistently, significantly and sustainably.”

Powell predicted policymakers would consider a 50 to 75 basis point hike in the federal funds rate at their next two-day meeting ending Sept. 21.

Referring to inflation, Cleveland Fed Chair Loretta Mester said: “What we want to do is see it on a sustainable downward path toward our long-term 2% target and we don’t haven’t seen that – we have more work to do.”

“You wouldn’t want to jump to the conclusion too quickly that inflation is on a downward path because of how high it is and the risk that if it stays high it could embed itself in the economy,” he said. Master on August 16. 2 in one Washington Post Podcast.

The Fed faces the challenge of raising borrowing costs enough to keep demand and inflation under control, but not enough to cause a recession. Public feedback on its determination to reduce price pressures could be passed on to consumers.

The New York Fed found in a survey last month that median inflation expectations in July 2023 had fallen to 6.2% from 6.8% in a June survey. Consumers expect inflation to be 3.2% in three years, down from 3.6% in June, and 2.3% in five years, down from 2.8% in the previous survey.

Expectations for gas and food price increases for the coming year have fallen sharply,” the New York Fed saidadding that consumers also expect slower house price growth.

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