High-stakes inflation report expected to show prices slowed in August but remain elevated

Inflation likely slowed in August for the second consecutive month. Still, consumer prices are expected to remain painfully high, keeping the pressure on the Federal Reserve to go big at its policy-setting meeting next week.

The Labor Department is releasing the highly anticipated consumer price index report on Tuesday morning, providing a fresh look at how hot inflation ran in August. 

Economists expect the gauge, which measures a basket of goods, including gasoline, health care, groceries and rent, to show that prices surged 8.0% in August from the previous year — down from the 8.5% reading in July and a marked decline from the 40-year high of 9.1% notched in June. On a monthly basis, inflation is projected to have decreased by 0.1%.

Still, the report is expected to show underlying momentum in inflation: core prices, which exclude the more volatile measurements of food and energy, are expected to climb 6.0% annually, snapping a four-month streak of slowing growth and marking the fastest pace since April. On a monthly basis, prices likely climbed 0.3%, driven by prices in areas like housing and rent.

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"The update on prices at the retail level will be a heavily scrutinized one as we attempt to answer several questions including if the worst of inflation is behind us," said Mark Hamrick, senior economic analyst at Bankrate. "Even if so, that doesn’t free us from inflation’s damaging and costly grip."

Fueling the price spikes are several issues related to the COVID-19 pandemic and the rousing economic rebound from the worst downturn in nearly a century. In the wake of lockdown orders that saw a broad swath of the country shuttered, the economy staged a stunning comeback, powered by unprecedented government spending, emergency steps by the Fed, and the widespread distribution of vaccines.

As Americans — flush with stimulus cash — ventured out to shop, eat and travel, businesses struggled to meet the demand, reporting difficulties in onboarding new employees and buying enough supplies to satisfy the need. To attract new talent, many businesses hiked wages — but to offset those increases, employers have reported raising the prices of their products.

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The matter was complicated by bottlenecks at ports and freight yards and a lack of shipping containers, snarling the global supply chain.

Since early spring, however, the Russian war in Ukraine has further exacerbated the inflation crisis by elevating food and energy prices. Oil and gasoline prices have declined sharply over the summer, although economists have cautioned the situation remains uncertain due to the ongoing conflict in Europe.

The report will also have significant implications for the Federal Reserve, which is tightening monetary policy at the fastest rate in decades as it tries to cool consumer demand and reduce out-of-control inflation. Policymakers approved back-to-back 75-basis point rate hikes in June and July for the first time since 1994 and have confirmed that a similarly sized increase is on the table at the meeting on Sept. 20-21. 

In a speech last month at the Kansas Fed's annual economic symposium in Jackson Hole, Wyo., Powell reiterated a pledge to continue raising interest rates and hold them at a higher level until price increases are tamed – even if it causes economic "pain."

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He stressed that policymakers need to see substantial evidence that inflation has slowed before taking their foot off the brakes.

"While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down," Powell said.

If the Augusti inflation data comes in hotter than expected, it could raise the odds of an even steeper rate hike in September and a more aggressive central bank in coming months.

"Federal Reserve officials, having effectively declared inflation as ‘public enemy number one’, are signaling that another outsized rate hike of 75 basis points for the upcoming meeting," Hamrick said. "They want to take their benchmark rate into restrictive territory and hold it there for longer awaiting what Chairman Jerome Powell has said must be ‘compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent.’ We remain far from that destination."

The Fed is also watching other economic indicators, including job growth and consumer inflation expectations. In a potentially reassuring sign, a New York Fed survey published on Monday shows that Americans' expectations of where inflation will be one year later fell sharply in August.

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But surprisingly strong job growth over the summer could prove worrisome to the Fed as it tries to cool the labor market.