The Federal Reserve's closely watched inflation gauge saw an acceleration in August 2023, primarily due to a surge in gas prices. Despite this, the underlying inflation measures showed signs of slowing, indicating that overall price pressures are still moderating, according to a report from the Commerce Department on Friday.
The report revealed a 0.4% rise in prices from July to August, a significant increase from the mere 0.2% rise in the previous month. Year-over-year, prices rose 3.5% in August, up from July's 3.4% increase. This marks the second consecutive rise in the year-over-year figure, which has fallen from its peak of 7% in June 2022 but still surpasses the Fed's 2% inflation target.
The main driver behind the price increase was a sharp rise in gas costs, mirroring the pattern seen in consumer price inflation figures issued earlier this month by the government. The average national price for a gallon of gas reached $3.84 on Thursday, up seven cents from a year ago, taking a larger slice out of Americans' paychecks.
However, when excluding volatile food and gas categories, "core" inflation remained relatively tame in August. Core prices rose only 0.1% from July to August, down from July's 0.2%. Year-over-year, core prices rose 3.9%, down from July's increase of 4.2%. These figures provide evidence that inflation is continuing to cool down, albeit at a slower pace than earlier this year.
The latest data aligns with rising optimism among Fed officials that they may be able to bring inflation back to their target without causing an increase in unemployment or triggering a recession. Last week's quarterly economic forecasts released by the Fed showed that policymakers expect joblessness to rise from its current 3.8% to a still-low 4.1% by the end of 2024, along with a gradual drop in core inflation to just 2.6%.
However, the possibility of a "soft landing," where inflation would fall back to the Fed's 2% target without a deep recession, faces growing threats. A potential government shutdown looms as a group of hard-right House Republicans have blocked a spending agreement. The extent to which a shutdown would impact the economy depends on its duration.
Further potential economic strains include the resumption of student loan payments in October for millions of people, reducing their discretionary spending. Additionally, long-term interest rates continue to rise, likely increasing the cost of mortgages, auto loans, and business borrowing. The interest rate on the 10-year Treasury note, a benchmark rate for mortgages, has reached nearly 4.6%, close to its highest level in 16 years.
Despite these challenges, Austan Goolsbee, president of the Federal Reserve Bank of Chicago, expressed optimism on Thursday that achieving lower inflation without causing a recession - what he termed the "golden path" - remained possible.
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