New Inflation Data Shows Prices Remain Stubbornly High

The Federal Reserve’s preferred inflation gauge remained elevated in new data released on Friday, further evidence that the central bank is contending with a stubborn problem as it tries to choke off the worst inflation in four decades.

The Personal Consumption Expenditures inflation measure, which is produced by the Commerce Department and is the measure the Fed officially targets as it tries to achieve 2 percent annual inflation, climbed by 6.2 percent in the year through August. While that was a slowdown from 6.4 percent in July, it was higher than the 6 percent economists in a Bloomberg survey had expected.

Inflation has been moderating somewhat on an overall basis partly because gas prices are declining. After stripping out food and fuel, both of which jump up and down, inflation climbed 4.9 percent in the year through August. That compares to 4.7 percent the month before. On a monthly basis, the core index picked up by 0.6 percent, a rapid pace of increase that was the fastest since June.

The data underlined what a rocky road the Fed faces as it tries to guide the U.S. economy toward slower inflation.

Economists are hopeful that healing supply chains, a slowing housing market, cooling consumer demand and a moderating labor market will combine to pull inflation lower in the months ahead. But Russia’s war in Ukraine poses a constant risk to the global supply of food and oil, and industries including automobiles remain severely disrupted. Rents and other service costs have been rising sharply, and labor shortages spanning many industries have pushed wages up, which could feed through to higher prices.

Those factors have prompted the Fed to stage its most aggressive campaign in decades to bring inflation under control. The central bank has raised interest rates five times this year — including three supersized three-quarter point increases — to try to slow down borrowing. As fewer people buy homes or expand businesses, the effect should trickle through the economy and labor market, slowing demand and bringing it back in line with supply.

But the Fed’s war on inflation comes at a risk. Policy takes time to work, and the Fed is moving so quickly in its bid to choke off inflation that it isn’t waiting to see the effects of its moves fully take hold before ushering in new ones.

As higher rates play through the economy to slow spending and weaken the labor market, the central bank could push up unemployment and even cause a painful recession. While officials are hoping that outcome can be avoided, they admit that the chances of averting a bad outcome have grown slimmer as inflation has remained persistently and painfully high and their policy path has become more aggressive.

While a recession would be bad for Americans, costing them jobs and likely slowing their wage gains, today’s inflation is also a burden on many households. Families are finding that it is harder to afford everything from housing to clothing and food, which is a particular burden for consumers with lower incomes who have less room to cut spending from their budgets or to substitute to cheaper options.

The risk, for the Fed, is that people and businesses might get used to today’s rapidly climbing prices. If that happens, they might adjust their behavior accordingly, with workers asking for faster pay increases and businesses passing those higher labor costs along to customers in the form of higher prices. If that were to happen, inflation could become a self-fulfilling prophesy.

Fortunately, measures of inflation expectations seem to be relatively stable, and have even declined somewhat in recent months. But Fed officials have been clear that after more than a year of rapid price increases, they do not want to take that stability for granted.

“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Jerome H. Powell, the Fed chair, said at his news conference on Sept. 21.