The Discouraging Reacceleration in Core Inflation

Most observers expected prices to fall in August after staying flat in July. But they rose +0.1%, despite the 10.6% decline in gas prices, which was offset by increases in the prices of shelter, food, and medical care. 

The real action in the report—the focus of the FED’s attention, and the figure most synonymous with future inflation—is core inflation. And that delivered a shock, rising +0.6% in August to 6.3% over the year. Recent surveys suggest the FED may be succeeding in bringing inflation expectations under control, but despite significant monetary tightening and hawkish statements about future policy, core inflation has continued to rise. 

That suggests the FED may have to hold rates higher for longer to tame inflation, with greater pain for the housing market and labor market along the way. 

Here are some highlights of today’s report:

  • Gas prices are, once again, the major player behind a slowdown in prices. Gas prices fell for the second month, and have continued to fall since the data were collected for today’s report. But gas prices are volatile and erratic. A jump in gas prices over the winter could take us right back to the higher inflation readings seen earlier this year.
  • Food prices slowed down but remained elevated. The food index increased 0.8% in August, the smallest monthly increase since December 2021, but far too high for comfort. In recent months, high gas price inflation is one factor that has contributed to high food prices, but it is not the only one. Supply chain disruptions, shifting consumption patterns, and the war in Ukraine have played their part as well, and taken a toll on grocery bills. 
  • Core inflation increased. Core inflation increased again by 0.6% over the month and 6.3% over the year, with both readings higher than the prior month. Since core inflation—the inflation rate excluding the volatile food and energy prices—is a better predictor of future inflation, this is concerning.
  • Real earnings increased two months in a row. Thanks to low overall month-over-month inflation the past two months, the purchasing power of workers’ paychecks is increasing. Real average hourly earnings for all employees increased 0.2% from July to August, but that comes on the heels of a substantial decline in purchasing power seen over the last year.

Written by

Sinem Buber is an economist at ZipRecruiter with a focus on US labor market insights and trends. Previously, she worked at ADP Research Institute where she published the ADP National Employment Report. She holds a PhD in Economics from The Graduate Center, CUNY.

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