Why lower gas prices don’t get rid of inflation: NPR

When it comes to inflation, the good news is that gas prices are dropping. The bad news is that other costs keep rising faster than wages, and this is putting pressure on many family budgets across the country.

The Ministry of Labor said on Wednesday that The annual inflation rate fell to 8.5% in July, up from 9.1% in the previous month. Falling gasoline prices offset the rise in the cost of other items, leaving the CPI unchanged between June and July.

After hitting a record $5.01 per gallon in June, the average price of gasoline has fallen sharply According to AAAto $4.01 a gallon on Wednesday.

“Sure, that’s better than $5,” says Spencer Sutton of Newport, Pennsylvania. “But compared to what we were paying before it all started with the war in Ukraine, it’s still pretty expensive.”

Sutton also worries about the rising cost of groceries, especially housing. To save on expenses while his wife finishes nursing school, the couple moved in with his mother.

“Being 30 years old, I didn’t think I’d still be living with my mom, with my brother and my wife,” Sutton says. “It’s certainly not the most perfect arrangement, but with what’s going on in our day and age, you have to do what you have to do.”

Why you should pay attention to core inflation

Housing costs – up 5.7% from a year ago – are a growing factor behind inflation. Only gradual increases in rent and housing prices are reflected in Labor Department data, and these costs tend to be more constant than volatile food and energy prices.

“This is moving in the wrong direction for the Federal Reserve,” says Diane Sonk, chief economist at KPMG. “We’re seeing some things come down in prices there and that’s great. But the other shoe to drop is the core inflation number.”

The annual core inflation rate, which does not include volatile food and energy prices, held steady in July at 5.9%. Core prices rose just 0.3% between June and July – the smallest increase in ten months.

Investors welcomed signs that inflation may be easing. The Dow Jones Industrial Average rose more than 450 points in the first hour of trading. But prices are still rising faster than wages, eroding the purchasing power of workers.

This year, Penelope Valdespino switched from a retail job to a higher-paying job in the school district in San Antonio, Texas. But soon her biggest paycheck is devoured by high prices.

“I’ve finally moved on to a different job, where yes, I’m going to get paid an extra $3 or $4 an hour,” she says. “That’s great, but catching up and keeping everything in order is still a challenge in this climate at the moment.”

Valdespino welcomes lower gasoline prices, but says it’s still keen to reduce non-essential car trips. And she’s keeping an eye on her pennies at the grocery store, where prices have jumped 13.1% from a year ago.

“We’re really careful about how much meat we buy,” she says.

Paychecks don’t keep pace with inflation

Sutton, who works for a dental insurance company, also got a raise this year, but says the money isn’t stretching as far as it used to be.

“It was not enough to combat inflation and the rising cost of food,” he says. “It’s hard to get to the weekend before you get paid and you run out of food and you’re digging outside the freezer trying to find something.”

Average wages in July rose 5.2% from a year ago – well below the rate of inflation.

Higher wages also complicate the Federal Reserve’s efforts to fight inflation.

“We know how painful inflation is, especially for those who live from paycheck to paycheck,” Federal Reserve Chairman Jerome Powell said last month.

The Fed is trying to control rising prices by aggressively raising interest rates in an attempt to curb demand.

But the Fed’s task has become more difficult after last week Better than expected report on the labor marketwhich showed that employers added 528,000 jobs last month.

“If we’re to believe these numbers, we made over half a million new paychecks in July, which is significant additional income,” says KPMG’s Swonk. “Even if individuals feel they are losing ground to inflation, this additional income supports demand,” maintaining upward pressure on prices.

Ahead of Wednesday’s inflation report, many observers had expected the central bank to agree to another, massive interest rate increase of 0.75 percentage point at its next meeting in September, in line with the rate hike in June And the July. after the report, Odds makers tend toward a lower rate increase 0.5 percentage point.

There is another benefit to lower gas prices

The sharp drop in gasoline prices may help curb inflation in another way.

Lower prices at the pump not only lowered the headline inflation rate for July, but also seemed to reduce people’s concerns about it. future inflation.

This is important because if people believe that prices will continue to climb out of control, this could become a self-fulfilling prophecy.

New survey by Federal Reserve Bank of New York He found that people’s expectations for inflation one year and three years into the future fell sharply between June and July, just as gas prices fell.

Sonk says gas prices have a huge impact on people’s attitudes toward the economy, even though other expenses like food and rent make up a larger part of the typical household budget.

“Even if you’re not driving, you’re walking or driving past a gas station,” Sonk says. “It’s something we all notice, front and center, every day.”