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Inflation was hotter than expected in August

JUANA SUMMERS, HOST:

There was hope building about new inflation numbers out today that they might show a big improvement. But that didn't happen. The government's consumer price index was worse than expected. The stock market sold off sharply, with the Dow plummeting almost 1,300 points. And there was a collective groan from economists. NPR's Chris Arnold has been following all of this. Hey, Chris.

CHRIS ARNOLD, BYLINE: Hey, Juana.

SUMMERS: So tell us what stood out in this report, Chris.

ARNOLD: Well, first, we should say that the overall rate of inflation did slow down a bit - you know, that's good - from an annual rate of 8.5% in July. It came down to 8.3% in August - a little bit. The thing is that gas prices accounted for almost all of that. And anybody who drives by a gas pump has seen gas prices are down. And that's good. It helps a lot of people. But for just about everything else besides gas - you know, food, new cars, medical care - all kinds of other stuff is rising. And that's showing that inflation is still stubbornly hot. I talked to economist Mark Zandi with Moody's Analytics just minutes after the report came out, and this was his first gut reaction.

MARK ZANDI: Ugh - disappointing. Underlying inflation is very strong, painfully high and, at least in the month of August, didn't show any signs of cooling off. So not good news.

SUMMERS: Yeah, he does not sound impressed.

ARNOLD: No.

SUMMERS: So, Chris, besides when people are filling up their gas tanks, it does not sound like there's much of a break for people from these higher prices.

ARNOLD: Right. And Zandi says the typical American household needs to spend - his estimate is about $450 more per month compared to a year ago because of inflation and these higher prices. So, you know, whether it's a few cents for a bunch of bananas at the grocery store - might not seem like much, but then there's a bigger electric bill to cool your house over the summer. You know, so all these things add up. And it's more than $5,000 a year for everyday people. And the big ugh (ph) here, too, for economists is that a month ago, we had a much better than expected inflation report in a number of ways. And so the hope was that this was going to be encouraging also. But then that didn't happen. One prominent Obama economic adviser tweeted today. The quote was, "this CPI report is terrible" - so no spin there.

SUMMERS: No, none at all. OK. So what about the Federal Reserve - anything that the Fed can do in the face of all of this inflation?

ARNOLD: Yeah. Next week, the Fed is poised to raise interest rates pretty sharply again. It'll likely be the third meeting in a row where the Fed's expected that they'll raise rates by three-quarters of a percent. And that is having an effect. It's cooled off the super hot housing market. You know, with mortgage rates being so high now, I mean, that's just put a lid on home prices. We're not seeing incredible price gains for houses. On the rental side, though, rents are still rising. And this winter, heating your house is likely to be a lot more expensive. And the Fed just has a tough assignment here to try to rein in prices on all these different things.

SUMMERS: OK. So I guess my question here is, are there any signs of hope when it comes to inflation?

ARNOLD: There is. I have one sign of hope for you. The Federal Reserve Bank of New York came out with a report about people's expectations about inflation, and that showed significant improvement. People - that is thinking that inflation will have cooled off a lot a few years down the road. And that's actually really important because if people were getting more panicked or more worried about inflation, Mark Zandi says that could really be damaging.

ZANDI: That's critical because once people begin to think that inflation's going to be high in the future, then they're going to demand higher wages from their employers to compensate. And employers are going to say, no big deal. Fine, I'll do it because I can pass along that higher wage cost to my customers in the form of a higher price. You get into this kind of self-reinforcing wage-price spiral, which we really don't want to get into.

ARNOLD: Now, it's the Federal Reserve's job to keep us away from that spiral. So, again, likely - it's likely going to keep hitting the brakes on the economy with higher interest rates, hopefully without tipping the economy into recession.

SUMMERS: That's NPR's Chris Arnold. Thank you.

ARNOLD: Thanks, Juana. Transcript provided by NPR, Copyright NPR.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.