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: The hottest inflation in 40 years shows little sign of cooling off

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Inflation didn’t increase in July and consumer prices barely rose in August. Great news for Main Street and Wall Street, right?

Ah, no. Falling gasolline prices have given Americans a break from the highest inflation in 40 years, but the cost of almost everything else is still rising.

In August, for example, the cost of groceries, rent, home furnishings, medical care new cars, auto insurance and education all surged.

What’s more, the cost of staples such as food, housing and medical treatment are rising at the fastest pace in decades.

Those increases were not reflected in the consumer price index in August and July because of tumbling gas prices. The average cost of a gallon of regular gas in the U.S. sank 21% during those two months.

That’s why the scant 0.1% in the “headline” CPI in August was so misleading.

If gas and food are set aside, the so-called core rate of inflation jumped 0.6% last month. That’s twice as fast as Wall Street expected.

“Americans saved on gasoline, but paid more for just about everything else in August,” said economist Katherine Judge of CIBC Capital Markets.

The core rate of inflation also climbed to 6.3% in August from 5.9% in the prior month — not far from a 40-year high of 6.5% registered in March. That’s more than triple the average inflation rate in the decade prior to the pandemic.

The Federal Reserve views the core rate as a better measure of future inflation trends because food and gas prices can jump sharply up and down over a short period.

That’s exactly what has happened with gas. The average U.S. cost of a gallon of regular gas rose from $3.28 at the start of 2022 to record $5 in June before sinking back to $3.69 in early September.

Put another way, the rapid increase in gas prices earlier in the year made headline inflation look worse than it was, and now it’s making the rate inflation look better than it really is.

Yet dig deeper and it’s clear that inflation, as the core CPI shows, has spread far and wide to encompass most of the economy. That’s a big warning sign.

What the core CPI reveals is that inflation has become embedded, at least temporarily, in the economy and it’s not going to be easy for the Fed to eradicate.

“Outside of falling gasoline prices, inflation appears to be just as hot as ever, which means that the Fed still has plenty of work to do,” said Stephen Stanley of Amherst Pierpont Securities.

That explains why bond yields surged
TMUBMUSD10Y,
3.438%

and the U.S. stock market
DJIA,
-2.59%

SPX,
-2.94%

did an about-face, posting big losses in Tuesday trades.

Wall Street investors worry the central bank will raise interest rates even more sharply than expected through the end of the year to try to tame inflation.

The Fed also risks throwing the economy into recession — and giving rise to a prolonged bear market.

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