Data released by the Bureau of Labor Statistics on Tuesday showed August prices rose 8.3 percent from a year earlier. That’s down from 8.5 percent in July and 9.1 percent from June. And while those measures are dangerously above normal levels, policymakers, economists and the American public are eager for firm signs that inflation has peaked this summer after soaring to a 40-year high. Inflation is the economy’s biggest problem, and its toll falls hardest on vulnerable families with little room to absorb higher costs for rent, groceries and everything in between. The Federal Reserve fights inflation by raising interest rates, which are designed to slow the economy by making all kinds of investments and loans—from mortgages to car loans to hiring—more expensive. The Fed’s goal is to use higher interest rates to reduce demand in the economy, especially since its tools can do nothing to fix issues like supply chain problems, worker shortages or the war in Ukraine. “There’s a broader story than ‘prices are falling,’” said Joe Brusuelas, chief economist at RSM. “That’s the requirement and that’s what the policy is right there.” Americans are finally feeling better about the economy But the fight Inflation brings heavy consequences and could eventually shake the economy as well violently, triggering recession and a new wave of job losses. Still, the Fed has sent a clear message: it’s pushing. “While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will cause pain to households and businesses,” Fed Chairman Jerome H. Powell said in a closely watched speech last month. . “This is the unfortunate cost of deflation. But a failure to restore price stability would mean much greater pain.” GOP seeks midterm reset as inflation, abortion ambitions Inflation also plays a political role, influencing midterm elections. The Biden administration has been slammed by Republicans for sweeping stimulus efforts from earlier in the pandemic that helped supercharge the economy. And this summer, rising gas prices in May and June further dampened Americans’ sentiments about the economy, sending consumer sentiment plummeting and President Biden’s poll numbers plummeting. But prices at the pump are steadily falling. After topping $5 in June, the national average for a gallon of natural gas was $3.70 on Tuesday, according to AAA. Republicans are trying to frame their policy message around inflation as they vie for control of the House and Senate. But inflation has lost some traction with voters lately, especially as gas prices continue to decline from summer highs and the labor market continues to move. Indeed, Americans are starting to feel better about the economy and consumer sentiment, which collapsed in June, has picked up. Lynn Farrell, president and owner of Chicago-based Windy City Travel, said business is booming, especially in luxury travel. People want to fly first class after a long overdue vacation. Farrell will create safari packages for customers looking for even more extravagant travel. Airfare is down from its summer highs, Farrell said. And for those who can afford it, the sheer excitement lowers inflation. “Travel is such an interesting barometer for consumer confidence,” said Farrell, en route to Chicago from a staff trip to Cancun. “We see that when consumers start to get a little stressed, booking windows get shorter or people don’t book trips as far away. … But travel can actually escape a lot of what’s going on in the economy because there’s so little demand.” The Fed is ready to pre-charge with higher interest rates Survey data released on Monday by the New York Fed also showed that US consumers expect significant reductions in future inflation levels. That’s welcome news for Fed officials gathering for their September policy meeting next week. Inflation expectations can be self-fulfilling, and the Fed’s job becomes more difficult if households and businesses anticipate that inflation will remain high and change their behavior as a result. The Fed is raising interest rates at its most aggressive pace in decades and raised them by three-quarters of a percentage point in July. Fed watchers and financial markets increasingly expect another hike of this magnitude next week as the Fed rushes to take interest rates high enough to slow the economy. Jackson Hole: Where Fed officials congregate and workers can’t afford to stay “[The Fed] said, “Listen, we’re not where we need to be, but at least we’re not as far behind as we were,” said Diane Swonk, chief economist at KPMG. However, the Fed’s moves can only address certain problems in the economy. Russia’s February invasion of Ukraine has already sent energy and gas prices soaring this year, and White House officials are worried about a looming energy crisis in Europe after Russian President Vladimir Putin threatened to impose a bleak winter on the continent. . “The progress in inflation may not prove supportive if these geopolitical tensions intensify and Russia cuts off all oil supplies,” Bruszuelas said. “Then we’re ready for another round of supply shocks.”
