Inflation Remained Stubbornly High in August, Rattling Consumers and Investors

Price increases remained uncomfortably rapid in August as a broad array of goods and services became more expensive even as gas prices fell, evidence that the sustainable inflation slowdown the Federal Reserve and White House have been hoping for remains elusive.

Prices rose 8.3 percent from a year earlier, a fresh Consumer Price Index report released on Tuesday showed. While slightly better than July’s 8.5 percent, the rate was not as much of a moderation as economists had expected. The report was particularly disappointing because, while falling gas prices reduced overall inflation, rising costs including rent, restaurant meals and health care offset that relief at the fuel pump.

Compounding the bad news, a core measure of inflation that strips out gas and food to get a sense of underlying price trends accelerated more than forecast.

The report is the latest sign for policymakers at the Federal Reserve, who have been raising interest rates to slow the economy and try to tame America’s worst bout of inflation in four decades, that continued aggressive action is likely to be needed to get price increases under control.

Stocks plummeted on Tuesday, with the S&P 500 falling 4.3 percent — its biggest drop since the depths of the pandemic in 2020 — as the data appeared to cement the case for another unusually large interest rate increase of three-quarters of a percentage point at the Fed’s meeting next week. That would be the third consecutive move of that size and bring rates to a range of 3 to 3.25 percent. Investors speculated that officials could even opt for a more drastic adjustment of a full percentage point this month or extend their campaign of swift rate moves for longer as price pressures prove relentless.

“Inflation momentum accelerated in all the wrong places,” said Blerina Uruci, a U.S. economist at T. Rowe Price, explaining that strong household balance sheets may be helping to sustain demand even as interest rates rise and borrowing becomes expensive.

“In this environment, monetary policy has to do that much more to cool down demand and have an effect on prices,” Ms. Uruci said.

President Biden, whose popularity with voters has suffered amid rising costs, sought to put a positive spin on the new data by noting that prices overall have been essentially flat over the past two months thanks to cheaper gas. But the fact that inflation retains so much staying power is likely to detract from the administration’s positive talking points.

That’s because the latest report’s details offered plenty to worry about.

Two products that had been major factors in inflation over the past year — gas and used cars — are now falling in price, a widely expected and important development. But the cost of other goods and services is rising so much that it is more than offsetting those declines.

Prices climbed 0.1 percent from July as rapid increases hit a variety of products and services, including food away from home, new cars, dental care and vehicle repair. Given how much gas prices fell in August, the price index had been forecast to decline on a monthly basis.

The upshot is that inflation retains a surprising amount of underlying momentum, which is bad news for Fed officials. Central bankers have been looking for a sustained slowdown in price increases as evidence that their policies are working to cool demand and nudge the economy back toward a healthy environment in which inflation is slow, steady and barely noticeable.

Until that happens, officials have pledged to continue raising interest rates quickly, which can slow borrowing, constrain consumer demand and tamp down hiring and wage growth.

“Inflation is far too high, and it is too soon to say whether inflation is moving meaningfully and persistently downward,” Christopher Waller, a Fed governor, said in a speech last week. “This is a fight we cannot, and will not, walk away from.”

So far, there is little sign that the Fed’s efforts are tanking consumer and business demand. Growth has slowed, but it has not plummeted, and both hiring and wage gains remain rapid. Employers added 315,000 jobs last month, job openings remain high and consumer spending has continued to eke out gains, albeit decelerating ones, this summer.

“Inflation remains hot, financial conditions have seen some improvement and the labor markets are humming along,” Neil Dutta, head of U.S. economics at Renaissance Macro, wrote in a research note after the release. “If the goal is to slow things down and create some pain, the Fed is failing by its own standard.”

As the economy chugs along, it may be giving businesses the wherewithal to pass along cost increases to their customers, protecting or even expanding their profits. Lael Brainard, the Fed’s vice chair, suggested in remarks last week that it might take time for companies to stop charging so much even as supply and demand conditions shifted.

“Although we are hearing some reports of large retailers planning markdowns due to excess inventories, we do not have hard data at an aggregate level suggesting that businesses are reducing margins in response to more price sensitivity among customers,” Ms. Brainard said.

If and when companies do start lowering prices and cutting into profits to compete for customers, the move could make an “important contribution” to reducing inflation in consumer goods, she later added.

So far, it is unclear when consumer and corporate behavior will begin to change.

Many economists had expected a slowdown in product prices in this report both because some firms have built up inventories that they want to sell off and because some of the costs that companies face, like gas and global shipping rates, have recently declined. Instead, a variety of retail goods — like furniture, clothing and bicycles — continued to grow pricier in August.

That could be a sign that companies are successfully passing the cost of rising wages along to consumers, said Robert Dent, an economist at Nomura, or that shoppers are coming to expect, and accept, climbing prices.

“Those things are concerning because they are so persistent and so difficult to break,” Mr. Dent said. For the Fed, “it’s going to be very hard to look at those details and find any glimmer of good news.”

As goods inflation lingers, services inflation has also been coming in strong — especially in housing costs. Shelter inflation picked up sharply in August, with a rent measure climbing at its fastest pace since the 1980s. That matters because housing-related prices make up about a third of overall inflation and are expected to remain elevated for some time.

Still, there are reasons to hope that inflation could fade in the months ahead. Continued supply chain improvement may help. Recent declines in fuel and grain prices could simply take time to pass along to consumers. Used-car prices could have further to fall, based on wholesale data.

But there are also risks that additional pressures will bubble up. Chinese lockdowns to contain the coronavirus persist in some cities, and Russia’s war in Ukraine poses continued uncertainty around global food and gas prices.

Given the vast uncertainty, the Fed is likely to maintain its responsive stance. Central bankers are wary of pulling back too soon, afraid that if they fail to stamp out inflation now, it will become a more permanent feature of the economy.

If people and companies expect prices to increase year after year, they might begin to act accordingly, with employees demanding better pay increases and firms steadily passing higher costs along to consumers.

Inflation expectations have actually declined in recent months, a possible sign that lower gas prices and recent Fed actions have helped to convince consumers that today’s rapid price increases will not last forever. But central bankers have been clear that they do not want to take for granted that things will stay that way and that they are very attuned to how consumers are thinking about inflation.

“It is very much our view, and my view, that we need to act now forthrightly, strongly, as we have been doing,” Jerome H. Powell, the Fed chair, said at a conference last week. “And we need to keep at it until the job is done.”

Jim Tankersley, Joe Rennison and Ben Casselman contributed reporting.