Higher inflation in August as conflict overseas continues to affect domestic prices: CEI analysis

The Consumer Price Index report for August shows inflation increased 0.4 percent across all sectors, with one-third of the increase being attributed to gasoline prices due to continued conflict overseas. With President Trump continuing to call for a cut in interest rates, CEI experts explain why that is unlikely to be the Fed’s next move.

CEI Senior Economist Ryan Young:

“The most important number in August’s CPI report is the core CPI, which is up 2.4 percent over the last year, and 0.3 percent during August. This core number strips out volatile food and energy prices, which often fluctuate for supply-and-demand reasons having nothing to do with the underlying monetary inflation the Federal Reserve is concerned with.

“The large difference between that 2.4 percent core CPI and the 3.4 percent overall CPI over the last year tells us two things. The first thing is that energy prices went up in a big way due to Iran. Gas prices have gone up 27.4 percent over the last year, and 3.9 percent just during August as Iran heated up yet again.

“The second thing is that most other prices are going up a little faster than target, but not radically so.

“Since this now makes 65 months in a row that inflation has been above target, the Fed is still likely to increase interest rates next week.”

CEI Finance and Monetary Policy Analyst Steve Swedberg:

“The latest CPI release provides yet another data point illustrating that persistent inflation has proven remarkably difficult to put behind us. Inflation has remained above the Fed’s 2 percent target for over five years. Fed Chair Kevin Warsh has warned that inflation is too high and has vowed to get inflation back to that target.

“At the same time, President Trump renewed his demand for lower rates and recently threatened to stop trading with countries where the US runs a trade deficit unless rates come down.

“The CPI figures underscore how the Fed is between a rock and a hard place. If inflation remains elevated, cutting rates could make it harder to convince markets and households that the Fed is serious about restoring price stability. But resisting calls for lower interest rates means accepting the political and economic consequences of tighter monetary policy.

“Will Warsh stand by his commitment to prevent higher inflation from becoming the new norm, or will he and the Fed’s Board of Governors acquiesce to the executive branch’s demand for cheaper money? Only time will tell.”