Bidenomics runs on steam
The risks of persistence of inflation became harder to ignore with Wednesday’s release of the Consumer Price Index (CPI) for August.
THE the consumer price index increased by 0.6 percent in August, ending a three-month run of weak monthly inflation numbers that had given confidence to investors and Federal Reserve officials that monetary policy was tight enough to bring inflation back to target by 2% over time. It was the largest monthly increase in the CPI since June last yearwhen it increased at the hyperspace rate of 1.8 percent.
Energy prices played an important role. The energy index rose 5.6 percent in August and all major energy component indices rose. The gasoline index jumped 10.6 percent for the month. As oil prices continue to rise, it seems likely that gasoline will continue to put upward pressure on overall inflation in the months ahead. On Wednesday, the price of a barrel of Brent – the oil price most closely linked to gasoline prices in the United States – was above $92 and rising.
Don’t ignore energy prices
Some argue that the Fed shouldn’t pay much attention to oil or gasoline prices. According to proponents of this view, raising an interest rate target is unlikely to have a short-term effect on oil or gasoline prices. These prices should therefore be ignored when the Fed sets its policy.
Although seemingly plausible, this edifice quickly collapses under the weight of a one-off analysis. Oil producers certainly believe that higher interest rates can lower demand for petroleum products, including gasoline. To the extent that higher interest rates slow the economy by decreasing aggregate demand or crowding out private investment, then Fed Policy Most Likely Influences Energy Prices.
Additionally, it is unclear whether rising oil prices are actually creating illusory inflation in the headline numbers. They may actually lower core inflation. Indeed, when businesses and households are forced to spend more on energy, they have less to spend on other goods and services. If you ignore energy inflation, you risk ignoring underlying inflationary pressures.
And since the United States is an energy producer, rising prices can create more demand for workers, machines and transport services. The idea that high energy prices are just a net drain on the U.S. economy is long outdated. Ironically, some anti-inflationary pressures could be created by Biden’s suppression of domestic oil production and overall anti-business regulatory stance that would dampen demand for the sector’s workers and equipment.
Gasoline prices displayed at a gas station in La Puente, California on September 7, 2023. (FREDERIC J. BROWN/AFP via Getty Images)
Fed officials are also concerned about falling energy prices in general and gasoline prices in particular. outsized effects on inflation expectations. Gasoline prices are among the most frequently encountered prices in daily life. They are decorated with illuminated road signs. Drivers see how much they spend on gas every time they fill up. This raises what economists call the “salience” of gas prices for inflation expectations.
Since Fed officials believe that inflation expectations have an important role in shaping actual inflation, they cannot afford to simply look beyond headline inflation, because it- This largely depends on energy.
The policy of high gas prices
Gasoline prices also have political importance. In our experience, many consumers become extremely frustrated when they hear economists or politicians talk about “core inflation” and downplay “volatile food and energy” prices. For many households, food and energy are at the heart of their budget. Acting like it doesn’t matter is aggravating. Fed officials, particularly Chairman Jerome Powell, are aware that ignoring rising gas prices risks arousing public anger and the politicians they elect to represent their interests.
We must also not lose that THE Fed’s Official Inflation Target Includes Energy, Food. The Fed’s 2% target relates to headline inflation as calculated by the personal consumption expenditures price index. Fed officials also make projections about core inflation and often slice and dice inflation numbers in creative ways — like the recently coined “super core services” figure that excludes all housing goods and services – but the Fed’s target is the more traditional and global number. .
Core inflation measures indicate that price pressures actually increased in August. The median CPI rose to 0.3 percent for the month, up from 0.2 percent, according to the Federal Reserve Bank of Cleveland. The truncated average measure of 16 percent did the same, going from 0.2 percent to 0.3 percent.
The Fed is likely to keep rates unchanged at the next meeting, but August inflation numbers will likely set the limits. step for an increase in November or December. The market’s odds of a rise in the final two months of the year were unchanged at just over 40 percent on Wednesday, about where they were last week. We would take over on this bet.
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