Cheaper gas likely put the brakes on high US inflation for a second month

WASHINGTON (AP) — A sign that the painful inflation of the past 18 months may be starting to ease may come on Tuesday, when the government is expected to report that U.S. price acceleration in August slowed for the second year-on-year month in a row has slowed .

Economists have forecast the report will show prices up 8.1% over the past 12 months, after four-decade highs of 9.1% in June and 8.5% in July, according to data provider FactSet. Significantly lower gasoline prices are responsible for much of the decline, along with the cost of used cars, airline tickets and clothing.

On a monthly basis – the figure most closely monitored by the Federal Reserve, the agency charged with fighting inflation – consumer prices are expected to have fallen 0.1% in August. It would be the first full decline in month-on-month inflation since May 2020 and would follow a flat reading in July.

Inflation has pushed up food bills, rents and families’ utility bills, among many other expenses, throwing households into trouble and deepening the gloom about the economy despite strong job growth and historically low unemployment.

But signs that inflation may have peaked may improve Democrats’ midterm election prospects and may have already contributed to slightly higher public approval ratings for President Joe Biden. Biden has generally stopped referring to the impact of high prices on the family budget in his speeches. He has instead highlighted his government’s recent legislative achievements, including a law enacted last month aimed at reducing drug prices and tackling climate change.

Still, Republicans blame Biden’s $1.9 trillion financial bailout, passed in March 2021, for contributing to higher prices. The legislation provided for a third stimulus check and improved unemployment benefits, boosting consumers’ ability to spend.

Many mainstream economists generally agree, although they also blame entangled supply chains, Russia’s invasion of Ukraine, and widespread shortages of items like semiconductors for fueling inflation. In recent months, however, supply chain backups have eased significantly, as has chip shortages. Oil prices have fallen to around $88 a barrel from a peak of $123 in March.

The average cost of a gallon of gas nationwide fell to $3.72 on Monday, down from just over $5 in mid-June. And many companies are reporting signs that backorders and inflation are starting to ease.

Elaine Buckberg, chief economist at General Motors, said the pandemic disruptions to overseas semiconductor production that reduced auto production “are largely gone and we’re in a much better position now.” Overall supply chain disruptions, she said, have improved by about 80% since the worst days of the pandemic.

Food prices have been a particular sore point for many families. In the past year, the prices of meat, milk and fruit and vegetables have risen by double digits. But executives at Kroger, the country’s largest grocery chain, said falling prices for soft commodities like wheat and corn could slow the rise in food costs this year.

“We expect inflation to level off somewhat in the second half of the year,” Kroger’s chief financial officer Gary Millerchip told investors last week.

Still, the Fed is expected to push through another significant hike in its short-term interest rate at next week’s meeting, despite signs of slowing inflation. Most analysts expect policymakers to announce a third straight quarter-point hike to a range of 3% to 3.25%.

The Fed’s rapid rate hikes — the fastest since the early 1980s — typically result in higher mortgage, auto and business loan costs in an effort to slow growth and lower inflation. According to mortgage buyer Freddie Mac, the average 30-year mortgage rate rose to nearly 5.9% last week, the highest in nearly 14 years.

Chair Jerome Powell said the Fed needs to see several months of low inflation readings suggesting rate hikes are falling back to its 2% target before it could suspend rate hikes.

The central bank also closely tracks prices, which exclude the volatile food and energy categories. So-called “core” inflation has also fallen from its peak, although it is forecast to rise to 6.1% yoy in August, from 5.9% in July. On a monthly basis, economists expect core prices to have risen 0.4% in August – double the rate the Fed would prefer – versus 0.3% in July.

Even after inflation has peaked, most economists don’t expect it to fall back to the Fed’s 2% target for at least two years, if not longer. Wages are still rising sharply – ahead of the inflation adjustment – which has increased demand for housing as more people move out on their own. A shortage of available homes has also forced more people to keep renting, increasing competition for apartments.

Rising rents and more expensive services like medical care are also keeping inflation high.

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