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Inflation Report to Reveal Price Moves 08/12 06:18
Is U.S. inflation stuck at a stubbornly high level or is it steadily cooling?
WASHINGTON (AP) -- Is U.S. inflation stuck at a stubbornly high level or is
it steadily cooling?
The government's latest report on consumer prices, to be released Wednesday,
should provide some hints. It will be closely watched by the inflation-fighters
at the Federal Reserve as well as Republicans facing tough midterm elections,
not to mention consumers still struggling with high grocery prices.
Americans have grappled with worsening inflation since early last year,
after tariffs lifted the cost of imported goods. Then this spring, the Iran war
raised oil and gas costs, pushing inflation to its highest level in three
years. The AI build out has also increased prices for computer chips and
electronic equipment. All three trends could end up having only temporary
effects and if they fade, inflation could drop back to the Federal Reserve's 2%
target.
Wednesday's inflation report is expected to show that consumer prices rose
3.4% in July from a year earlier, according to a survey of economists by data
provider FactSet. That would be down from 3.5% in June and lower than the
recent peak of 4.2% in May.
On a monthly basis, prices are expected to have risen just 0.1% from June to
July, after they fell in June on sharply lower gas costs.
Excluding the volatile food and energy categories, core inflation may cool
for a second month, to 2.5%, down from 2.6% in June, according to FactSet. Core
prices -- which the Fed pays particularly close attention to -- likely rose
0.2% from June to July.
A big reason inflation has cooled in the past couple of months is that gas
prices fell after a ceasefire was reached in the U.S.-Iran war. Average gas
prices were lower last month than in June, so that should reduce last month's
inflation reading. But gas prices rose again in late July and earlier this
month, meaning inflation could pick up again when August's figures are released
next month, adding a layer of uncertainty.
On Wednesday, gas averaged $4.04 a gallon nationwide, 16 cents higher than a
month ago, according to the motor club AAA.
Overall, price increases have stayed above the Fed's 2% target for more than
five years, suggesting that more than temporary factors may be at work. The
cost of services such as healthcare, restaurant meals, and car maintenance are
on average rising at more than 3% annually, and they aren't particularly
sensitive to gas prices or AI investment.
Rising costs for services often reflect higher wages, as companies charge
more to offset the cost of higher pay. But incomes aren't growing fast enough
to sustain inflation, economists note.
It's a confounding situation that has left many economists -- and Fed
officials -- seeking more information to determine where inflation is headed.
"You've got all these things that are just not the way the economy used to
behave," Diane Swonk, chief economist at KPMG, said.
For many consumers, years of sharply rising grocery prices have led them to
adopt a wide range of coping strategies, from comparison shopping, to
couponing, to cutting back on favorite foods.
Some retailers, such as Walmart, have responded by rolling back food prices,
a trend that could have lowered July's inflation figures. Yet many other firms
are still passing on higher costs.
Paint company Sherwin-Williams is planning an 8% price increase effective
Sept. 1 to offset higher raw material costs, CEO Heidi Petz told analysts late
last month. She said that because of the company's strong relationships with
suppliers, it was able to delay price increases until now.
"We are seeing the impact of higher oil and related cost pressures, and we
expect continued volatility throughout the balance of the year," she said.
Wednesday's report comes as the Federal Reserve is sharply divided over
whether it should hike its key interest rate to combat inflation. The Fed kept
its rate unchanged, at about 3.6%, at a meeting late last month. But the vote
was 9-3, with three dissenters favoring a rate hike.
And at a July 29 news conference explaining the decision, chair Kevin Warsh
was vague about the Fed's next steps, in keeping with his focus on reining in
the central bank's previous willingness to signal whether it was prepared to
raise or cut borrowing costs.
"If inflation continues to be elevated ... interest rates could well be part
of that solution," he said. "But I wouldn't say it's in isolation."
Long-term interest rates rose after Warsh's comments, suggesting investors
worried that inflation could worsen in the coming months and the Fed might not
lift borrowing costs to fight rising prices.
Complicating matters, the government said last week that employers had cut
jobs in July, a sign of potential economic weakness. The Fed typically avoids
rate hikes when hiring is faltering, because higher borrowing costs could slow
the economy further.
Investors now see the odds of a rate hike at the Fed's next meeting in
September as roughly 50-50, according to CME Fedwatch.
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