As Fed fights inflation, recession fears grow

Is Inflation actually under control?

Jerome Powell.
(Image credit: Brendan Smialowski-Pool/Getty Images)

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"Investing lesson of the week," said The Wall Street Journal in an editorial: "Never trust a politician." Word out of the White House for weeks has been that "inflation is under control," and the markets took Washington's word for it. But last week's Consumer Price Index was a reality check: Inflation is still raging. Overall inflation seemed to rise only a little, to 8.3 percent. But that's deceptive, because gasoline prices dropped 10.6 percent; other prices went up across the board. Food costs are now "the biggest pain point for consumers," with grocery prices up 13.5 percent from a year ago. Core prices, which exclude food and energy, "also keep rising." The 6.2 percent surge in shelter costs for the year is the highest since 1983. It's no surprise that markets promptly suffered one of the worst weeks of the year on the release of the report, which confirmed that the Federal Reserve must continue its economic tightening.

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The CPI numbers need to be put in perspective, said John Cassidy in The New Yorker. "In June, the headline inflation rate was 9.1 percent, so in two months it has declined by 0.8 percentage points." That's nothing to scoff at. The steady decline in fuel prices also "augurs well for anyone who buys food," since one of the factors influencing food costs is higher transportation costs. The slowdown we've seen in the housing market is also encouraging, because "buying will become a more attractive option, reducing demand for rentals."

Picking out a few positive signs and saying they mean inflation will go away is wishful thinking, said Henry Olsen in The Washington Post. "President Biden rightly touts falling gas prices as an accomplishment," but "the money Americans save when filling their tanks simply goes out the door to pay for the food on their tables." There is no doubt that inflation will stick around as a major election issue. The CPI report "pretty much dashed" the hopes that the 2021–22 inflation surge would resolve harmlessly, said Paul Krugman in The New York Times. "There will, alas, be pain." The economy and labor market "are still running very hot," and we won't get inflation down until those change. The Fed's rate hikes will cause unemployment to rise, although economists differ on their predictions for how high it needs to go. "The truth is that nobody knows for sure."

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