Recently released data showed a significant increase in inflation, defying expectations of the Biden administration and pressuring consumers during the current difficult economic conditions. The result could have a significant impact both on the Federal Reserve’s decision whether or not to raise interest rates further, as well as on President Joe Biden’s reelection effort.
Overall, the Consumer Price Index (CPI) increased by 3.7% in August. The 0.6% increase in inflation came as particularly bad news for the nation’s economy. This is the highest monthly increase in inflation since last summer.
Much of the increase in prices came during an increase in gas and diesel costs, although they were slightly lower than in July. Core consumer prices, which do not include food and energy, were also up 0.3% month-over-month.
The announcement sent stocks lower on Wednesday after the unexpected increase. The decline also comes after a number of Wall Street drops over the last several weeks.
An economist looks at this and says hey, grocery prices aren't adding to inflation any longer. A normie looks at this and says hey groceries still are 17% more expensive than 2 years ago. Why aren't they going down? https://t.co/bza7W3Zs39
— Greg Ip (@greg_ip) September 13, 2023
The increase in the inflation rate means that the Fed will be under increased pressure to raise interest rates. An interest rate hike should tamp down inflation but run an increased chance of causing a recession. Higher borrowing costs often slow the rate of business expansion, as well as auto and home purchases.
The Federal Reserve has walked a fine line, attempting to bring down inflation without also causing a recession. However, the Fed has also signaled that it was willing to keep raising rates as long as necessary to bring price hikes down.
The Fed’s goal is a 2% inflation rate.
The central bank is expected not to raise rates at its Sept. 20 meeting. However, Federal Reserve Chairman Jerome Powell has recently stated that his agency will keep rates high as long as necessary to reduce inflation.
The Fed’s decision may also be tied to the recent increase in the unemployment rate. The increase to 3.8% in August could also be a sign of a weakening economy, and thus less impetus to raise rates further.