Inflation remains stubbornly high, raising fears of more interest rate hikes

The August inflation report is out and the U.S. Labor Department says overall consumer prices rose 8.3% from a year ago. That's slightly lower than July's increase, but amid fears of more interest rate hikes, it led to Wall Street's worst day since June 2020. Economist Julia Coronado of MacroPolicy Perspectives joined Judy Woodruff to discuss.

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  • Judy Woodruff:

    The August inflation report is out, and the upshot is, gas prices have dropped, but the bottom line is still worse than expected.

    The U.S. Labor Department says overall consumer prices rose 8.3 percent from a year ago, slightly smaller than July's increase. But the rate of increase for core items, not counting food and fuel, surged more than 6 percent from a year earlier. That was sharply higher than July's figure.

    The report triggered Wall Street's worst day since June of 2020, amid fears of more interest rate hikes. The Dow Jones industrial average lost 1,276 points to close below 31105, down 4 percent. The Nasdaq fell 5 percent. The S&P 500 was down 4.3 percent.

    To help us understand more about this day's news, I'm joined by economist Julia Coronado. She's the founder of her own firm, MacroPolicy Perspectives, and a former economist for the Fed.

    Julia Coronado, welcome back to the "NewsHour."

    So, we do see gas prices coming down. There are other hints that demand may be slowing. Why is inflation persisting?

  • Julia Coronado, MacroPolicy Perspectives:

    Yes, we had hoped for better from this report.

    And, as you said, we did see the relief on gas prices, but a broad range of other goods and services that consumers spend their money on, those prices kept rising. And that came despite improving supply chain functioning, signs of shipping costs and other commodity prices declining.

    All of that had led us to hope and expect more of that relief passed on to the consumer. But we just didn't see that. We haven't seen that. Areas like new cars and furniture, prices continue to rise, despite, as you noted, moderating consumer demand, improved production and supply chain operations.

    So, so far, that relief that we are seeing in the wholesale level is not being passed along to consumers.

  • Judy Woodruff:

    So I'm hearing — you have said that twice now, not passed on to consumers.

    Why isn't it being passed on by these companies to consumers?

  • Julia Coronado:

    Well, we're going to be in a tug-of-war in the next few months.

    We — companies, especially companies that sell goods that consumers bought in scale during the pandemic and were relatively price-insensitive because they were in lockdown, those companies enjoyed really healthy, strong profit margins through the pandemic, and they're trying to hold on to those profit margins, and not accept narrower margins.

    And so it's really going to be up to competitive pressures in markets like cars and furniture for consumers to express their sentiments with their wallets, and force some bargaining and some relief. And so it's going to be a process that will play out probably over a number of months.

  • Judy Woodruff:

    So, do I understand you to say that a lot of this, much of this is at the discretion of these big companies that determine prices?

  • Julia Coronado:

    Yes, I mean, this is an inflection point in the economy.

    We are seeing consumers, we're seeing demand slow. Consumer spending has slowed down quite a bit from the soaring numbers of last year. Things like car sales have been quite weak this year, despite improving production numbers. So there is a sort of decision that, say, for example, car dealers need to make that, do you want to keep selling fewer cars at higher prices, or do you want to sell more cars at more competitive prices?

    And, so far, that dam hasn't broken in the consumers' favor. But at some point, there will be enough inventories on hand. It's also interesting, Judy, because we have been hearing through company reports through some of the major retailers, they have been talking about rising inventory levels and the need to discount. It's just not showing up in the data in any decisive or broad-based way yet, though.

  • Judy Woodruff:

    So, we have been expecting the Federal Reserve to raise interest rates when they meet next week another three-quarters-of-a-percent.

    How is all this news likely to affect their thinking?

  • Julia Coronado:

    Well, it certainly solidifies the jumbo 75-basis-point, three-quarter-of-a-percentage point rate hike next week. That's a done deal.

    And what it does is, it raises the likelihood that more jumbo rate hikes lie ahead. So the market reacted so strongly because we had had a string of data that pointed to more sort of a soft landing scenario. The July inflation report had been quite hopeful.

  • Judy Woodruff:

    Right.

  • Julia Coronado:

    The labor market data has been quite resilient. And so that data spoke to maybe the U.S. economy will make it through this rate hiking cycle without going into a recession.

    This report is a vote in — on the hard landing side. It suggests that the Fed is going to have to keep raising rates until we really see broader-based relief on the inflation front. It can't just be gas prices.

  • Judy Woodruff:

    And just in a quick nutshell, the health of the overall U.S. economy?

  • Julia Coronado:

    We're still growing. I mean, certainly, the labor market has been quite strong. The unemployment rate remains well below 4 percent. That's a very low unemployment rate.

    And consumers are feeling a bit better from that relief on gas prices. So, overall, we're still kind of muddling along, growing, not dipping into a recession yet. But, again, I think the risk of that kind of a scenario for next year, the market — that's what the market is seeing. The risk of that scenario is rising if inflation doesn't cool off.

  • Judy Woodruff:

    Julia Coronado, thank you very much.

  • Julia Coronado:

    My pleasure.

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