Gas Prices Are Down, But Inflation (Especially Food and Housing) Persists

On Monday, the Washington Post reported, Americans are finally feeling better about the economy:

After months of gloom, Americans are finally starting to feel better about the economy and more resigned to inflation.

Consumer sentiment, which hit rock bottom in June, has begun inching up in recent weeks. Gas prices are down. Decades-high inflation appears to be easing. And at the same time, Americans are making small changes — buying meat in bulk, for example, or shifting more of their shopping to discount chains — suggesting that many families are learning to deal with higher prices.

“While consumer sentiment is still fairly low by historic standards, we’re starting to see pretty dramatic improvements,” said Joanne W. Hsu, an economist at the University of Michigan and director of its closely watched consumer surveys. “It’s very much being driven by a slowdown in inflation, particularly with the decline in gas prices.”

Gas prices, which peaked at more than $5 a gallon in June, are down to about $3.74 a gallon nationwide. That 25 percent drop in costs has been substantial for many Americans, particularly those in lower-income households where gas costs make up a larger share of weekly expenses.

UPDATE: U.S. Gas Prices Have Fallen for 91 Straight Days, a Relief for Consumers: “After peaking at $5.02 in June, gasoline prices have dropped for 91 straight days, and the national average stood at just over $3.70 a gallon on Tuesday, data from AAA show.” (I just paid $3.19 per gallon today in Tucson).

Overall inflation, meanwhile, has eased slightly — prices remained flat in July, though they’re still up 8.5 percent from a year ago — as a result of aggressive interest rate hikes by the Federal Reserve.

Even so, the impact on both pocketbooks and psyches has been swift. Measures of business conditions, short-term financial prospects and purchasing plans all improved in August, according to key metrics from the Conference Board. Consumer confidence increased that month after falling for three straight months, and the number of Americans reporting vacation plans reached an eight-month high.

Yeah, that was on Monday.

On Tuesday, the Washington Post reported, Rising food and housing costs kept inflation high in August. Updted version, Stocks sink after inflation report shows unexpected price climb in August:

Wall Street recoiled Tuesday — with the Dow Jones industrial average nosediving more than 1,200 points — after a new government report showed that consumer prices continued rising in August despite efforts to slow their momentum.

The inflation data instantly dashed Wall Street’s hopes that the Federal Reserve might ease up on its campaign of aggressively raising interest rates.

The Dow tumbled 1,276 points, or 3.9 percent, following the release of the report, which showed prices unexpectedly climbed 0.1 percent from July to August. The tech-heavy Nasdaq fell more sharply, shedding nearly 5.2 percent, while the S&P 500 slumped 4.3 percent. It was the stock market’s biggest one-day decline in more than two years.

A number of economists had been hopeful that the precipitous, two-month decline in gas prices would finally help cool inflation, but the data released Tuesday showed how large price increases persist for core items that make up a central part of most families’ budgets. Housing and food remained major strains.

The government’s food index, for example, has risen 11.4 percent over the past year, the largest 12-month increase since May 1979. Food prices were up 0.8 percent from July to August. Flour was up 2.2 percent over that span. Potato prices rose 2.5 percent. Butter jumped 1.9 percent, and canned fruit spiked 3.4 percent.

The figures came from the Bureau of Labor Statistics, which released its monthly consumer price index. It showed that, overall, costs were up 8.3 percent in August compared with 12 months earlier, higher than analysts expected. The overall figure was lower than the inflation rate notched in July and June, but many economists were expecting to see a steeper decline.

The new report could sober Democrats’ hopes that inflation would recede as an issue before the midterm elections. And there are growing concerns energy prices could rise later this year if Russia causes a European energy crisis and roils the global economy.

Numerous, competing forces continue to press on the economy more than two years after the pandemic began. The labor market remains remarkably strong, keeping unemployment low and helping lift wages. Recession fears have eased in recent months, but big price increases have eaten into those wage gains.

Republicans have pointed at inflation and charged that Democrats can’t be trusted on economic matters [Note: Republicans have no plan, and know nothing about economics], but Democrats have countered they are taking steps to ease price pressures. President Biden on Tuesday touted new legislation called the Inflation Reduction Act, which supporters say will bring down the cost of things like pharmaceuticals and energy.

[T]here are signs that inflation might have hit its peak in June, when it notched 9.1 percent over 12 months. But price increases have not slowed as much as some had imagined. A number of factors are keeping prices high.

Rent, for example, keeps going up because there’s so much more demand for units than there are homes to go around.

Food prices, meanwhile, are jumping for a host of different reasons. Beef is more expensive, in part, because of high feed and water costs as well as droughts in most ranchlands. Fruits and vegetables are being pinched by droughts in California, among other things. And even though gas prices have fallen, some energy prices keep rising. Electricity costs, for example, rose 1.5 percent in August, the fourth straight month of at least a 1.3 percent increase. [Because of excessive heat.]

It’s the climate change, stupid! Inflation is the cost we will now pay for having done nothing about climate change for decades. When the Colorado River dries up, food cannot be grown. Then we will be talking about food scarcity, and price gouging for what little food is available.

“We thought we’d see inflation start to come down, and instead what we’ve seen is inflation really sort of entrenched,” said Betsey Stevenson, professor of public policy and economics at the University of Michigan and a former member of the White House Council of Economic Advisers. “If there’s no real progress, then that says, ‘Does the Fed need to take stronger action?’ And if the Fed needs to take stronger action, what does that mean for the risk to peoples’ livelihoods?”

Looking ahead, officials are also growing concerned about how the global fight to tame inflation could be thwarted by a looming energy crisis in Europe, amid Russian President Vladimir Putin’s threats to force a bleak winter on the continent. And even though the U.S. labor market remains extremely strong and consumer confidence has ticked back up in recent weeks, the economic recovery remains fragile for many Americans.

[T]he Fed and some economists prefer to focus on a measure of inflation known as “core inflation,” which strips away more volatile categories like food and energy. But even that gauge came in hotter than expected, and reflected added strain in peoples’ everyday lives. Costs for housing, medical care, new cars and household furnishings were all up compared with the month before. Prices for water and trash collection services, hospital services and prescription drugs also picked up.

We’re seeing services that aren’t housing, that aren’t energy services, that the inflation rate is picking up, and that worries people because that indicates higher entrenched inflation,” Stevenson said.

There were some exceptions. The gasoline index dropped 10.6 percent as prices at the pump fell off their summer highs. Costs for airfares and used cars also dropped.

Before the latest inflation report, markets had already expected the Fed to hike rates by three-quarters of a percentage point at its policy meeting next week. That now appears to be fully locked in.

Still, the fight against inflation brings heavy consequences. If the economy slows too quickly, it could slip into a recession and millions of Americans could lose their jobs. Still, the Fed has sent a clear message: It is pressing on.

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Fed Chair Jerome H. Powell said in a closely watched speech last month. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Inflation is also playing a political role, factoring into the midterm elections. Republicans have said the Biden administration’s economic 2021 stimulus plan made inflation worse [Republicans passsed three larger stimulus bills in 2020]. Democrats have countered that this law helped fuel the economic recovery and that inflation is being caused by other factors, such as Russia’s February invasion of Ukraine. This summer, surging gas prices caused consumer sentiment — and Biden’s approval ratings — to plummet. But gas prices have been on a steady decline since June, falling from $5 per gallon on average to Tuesday’s recent low of $3.70, according to AAA.

Note: A new IBD/TIPP poll finds President Biden’s approval rating jumped 6.6 points to 49%, the highest since April. Younger Americans, in particular, rallied around Biden following approval of the climate-focused Inflation Reduction Act and his decision to forgive up to $20,000 in college loans.

“The fact that core [inflation] came in above expectations is just a reminder that price pressure remains unacceptably high, and that the president’s three-tiered approach is as relevant as ever,” Jared Bernstein, a member of Biden’s Council of Economic Advisers, told The Post. “Fed independence, doing what we can to help family budgets, and deficit reduction.”

Republicans have been looking to frame their midterm political message around inflation as they vie for control of the House and Senate. [Note: Republicans have no plan, and know nothing about economics.] The effectiveness of that strategy is unclear, especially as gas prices have consistently fallen from their summer highs and the job market is still cranking.

Americans are beginning to feel better about the economy, and consumer sentiment, which collapsed in June, has been inching up. Lynn Farrell, president and owner of Chicago-based Windy City Travel, said business is booming, especially on luxury travel. People want to fly first class after long-delayed vacations. Farrell will put together safari packages for clients seeking even more extravagant trips.

Airfares have come down from their summer surges, Farrell said. And for those who can afford it, sheer excitement is cutting through inflation’s toll.

“Travel is such an interesting barometer on consumer confidence,” Farrell said, en route to Chicago from a staff trip in Cancún. “We see that when consumers start to get a little bit anxious, the booking windows shorten, or people don’t book travel out as far. … But travel may actually escape a lot of what’s happening in the economy because there’s such pent-up demand. [Pent-up demand for a static supply will drive up the cost.)

CNBC adds, Inflation isn’t just about fuel costs anymore, as price increases broaden across the economy:

For the better part of a year, the inflation narrative among many economists and policymakers was that it was essentially a food and fuel problem. Once supply chains eased and gas prices abated, the thinking went, that would help lower food costs and in turn ease price pressures across the economy.

August’s consumer price index numbers, however, tested that narrative severely, with broadening increases indicating now that inflation could be more persistent and entrenched than previously thought.

CPI excluding food and energy prices — so-called core inflation — rose 0.6% for the month, double the Dow Jones estimate, bringing year-over-year cost-of-living increases up 6.3%. Including food and energy, the index rose 0.1% monthly and a robust 8.3% on a 12-month basis.

At least as important, the source of the increase wasn’t gasoline, which tumbled 10.6% for the month. While the summertime decline in energy prices has helped temper headline inflation numbers, it hasn’t been able to squelch fears that inflation will remain a problem for some time.

The broadening of inflation

Rather than fuel, it was food, shelter and medical services that drove costs higher in August, slapping a costly tax on those least able to afford it and raising important questions about where inflation goes from here.

“The core inflation numbers were hot across the board. The breadth of the strong price increases, from new vehicles to medical care services to rent growth, everything was up strongly,” said Mark Zandi, chief economist at Moody’s Analytics. “That was the most disconcerting aspect of the report.”

Indeed, new vehicle prices and medical care services both increased 0.8% for the month. Shelter costs, which include rents and various other housing-related expenses, make up nearly a third of the CPI weighting and climbed 0.7% for the month.

Food costs also have been nettlesome.

The food at home index, a good proxy for grocery prices, has increased 13.5% over the past year, the largest such rise since March 1979. Prices continued their meteoric climb for items such as eggs and bread, further straining household budgets.

For medical care services, the monthly increase of 0.8% is the fastest monthly gain since October 2019. Veterinary costs rose 0.9% on the month and were up 10% over the past year.

“Even things like apparel prices, which often decline, were up a little bit [0.2%]. My view is that with these lower oil prices, they stick and assuming they don’t go back up, that will see a broad moderation of inflation,” Zandi said. “I have not changed my forecast for inflation to get back to [the Federal Reserve’s 2% target] by early 2024, but I’d say I hold that forecast with less conviction.”

On the positive side, prices came down again for things such as airline tickets, coffee and fruit. A survey released earlier this week by the New York Fed showed consumers are growing less fearful about inflation, though they still expect the rate to be 5.7% a year from now. There also are signs that supply chain pressures are easing, which should be at least disinflationary.

Higher oil possible

But about three-quarters of the CPI remained above 4% in year-over-year inflation, reflecting a longer-term trend that has refuted the idea of “transitory” inflation that the White House and the Fed had been pushing.

And energy prices staying low is no given.

The U.S. and other G-7 nations say they intend to slap price controls on Russian oil exports starting Dec. 5, possibly inviting retaliation that could see late-year price increases.

“Should Moscow cut off all natural gas and oil exports to the European Union, United States and United Kingdom, then it is highly probable that oil prices will retest the highs set in June and cause the average price of regular gas to move well back above the current $3.70 per gallon,” said Joseph Brusuelas, chief economist at RSM.

Brusuelas added that even with housing in a slump and possible recession, he thinks price drops there probably won’t feed through, as housing has “a good year or so to go before the data in that critical ecosystem improves.” [Normally over 3 years.]

With so much inflation still in the pipeline, the big economic question is how far the Fed will go with interest rate increases. Markets are betting the central bank raises benchmark rates by at least 0.75 percentage point next week, which would take the fed funds rate to its highest level since early 2007.

“Two percent represents price stability. It’s their goal. But how do they get there without breaking something,” said Quincy Krosby, chief equity strategist at LPL Financial. “The Fed isn’t finished. The path to 2% is going to be difficult. Overall, we should start to see inflation continue to inch lower. But at what point do they stop?”