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Stocks sink after inflation report shows unexpected price climb in August

The Dow skids more than 1,200 points as falling gas prices can’t compensate for a bump in other products that are a core part of many Americans’ budgets

Customers refuel at a Costco gas station in Concord, Calif., on June 22. Gas prices continued to ease in August, helping keep inflation more in check. (David Paul Morris/Bloomberg News)
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Wall Street recoiled Tuesday — with the Dow Jones industrial average nosediving more than 1,200 points — after a new government report showed that consumer prices continued rising in August despite efforts to slow their momentum.

The inflation data instantly dashed Wall Street’s hopes that the Federal Reserve might ease up on its campaign of aggressively raising interest rates.

The Dow tumbled 1,276 points, or 3.9 percent, following the release of the report, which showed prices unexpectedly climbed 0.1 percent from July to August. The tech-heavy Nasdaq fell more sharply, shedding nearly 5.2 percent, while the S&P 500 slumped 4.3 percent. It was the stock market’s biggest one-day decline in more than two years.

A number of economists had been hopeful that the precipitous, two-month decline in gas prices would finally help cool inflation, but the data released Tuesday showed how large price increases persist for core items that make up a central part of most families’ budgets. Housing and food remained major strains.

The government’s food index, for example, has risen 11.4 percent over the past year, the largest 12-month increase since May 1979. Food prices were up 0.8 percent from July to August. Flour was up 2.2 percent over that span. Potato prices rose 2.5 percent. Butter jumped 1.9 percent, and canned fruit spiked 3.4 percent.

The figures came from the Bureau of Labor Statistics, which released its monthly consumer price index. It showed that, overall, costs were up 8.3 percent in August compared with 12 months earlier, higher than analysts expected. The overall figure was lower than the inflation rate notched in July and June, but many economists were expecting to see a steeper decline.

The new report could sober Democrats’ hopes that inflation would recede as an issue before the midterm elections. And there are growing concerns energy prices could rise later this year if Russia causes a European energy crisis and roils the global economy.

Numerous, competing forces continue to press on the economy more than two years after the pandemic began. The labor market remains remarkably strong, keeping unemployment low and helping lift wages. Recession fears have eased in recent months, but big price increases have eaten into those wage gains.

Republicans have pointed at inflation and charged that Democrats can’t be trusted on economic matters, but Democrats have countered they are taking steps to ease price pressures. President Biden on Tuesday touted new legislation called the Inflation Reduction Act, which supporters say will bring down the cost of things like pharmaceuticals and energy.

Inflation emerged as a major economic strain last year, fueled by soaring demand for goods and services that exacerbated supply chain problems. Federal Reserve and White House officials thought the burst in price increases would prove temporary. As it became clear their forecasts were wrong, the Fed in March began raising interest rates, hopeful that this would cool demand in the economy, slowing price growth.

There are signs that inflation might have hit its peak in June, when it notched 9.1 percent over 12 months. But price increases have not slowed as much as some had imagined. A number of factors are keeping prices high.

Rent, for example, keeps going up because there’s so much more demand for units than there are homes to go around.

Food prices, meanwhile, are jumping for a host of different reasons. Beef is more expensive, in part, because of high feed and water costs as well as droughts in most ranchlands. Fruits and vegetables are being pinched by droughts in California, among other things. And even though gas prices have fallen, some energy prices keep rising. Electricity costs, for example, rose 1.5 percent in August, the fourth straight month of at least a 1.3 percent increase.

“We thought we’d see inflation start to come down, and instead what we’ve seen is inflation really sort of entrenched,” said Betsey Stevenson, professor of public policy and economics at the University of Michigan and a former member of the White House Council of Economic Advisers. “If there’s no real progress, then that says, ‘Does the Fed need to take stronger action?’ And if the Fed needs to take stronger action, what does that mean for the risk to peoples’ livelihoods?”

Americans are finally feeling better about the economy

Looking ahead, officials are also growing concerned about how the global fight to tame inflation could be thwarted by a looming energy crisis in Europe, amid Russian President Vladimir Putin’s threats to force a bleak winter on the continent. And even though the U.S. labor market remains extremely strong and consumer confidence has ticked back up in recent weeks, the economic recovery remains fragile for many Americans.

At the Second Harvest Foodbank of Southern Wisconsin, the amount of food distributed last month (1.86 million pounds) was actually more than the amount from August 2020 (1.76 million), before vaccines were available and unemployment was higher. Not every month has hit new highs. But overall, Kris Tazelaar, director of marketing and communications, said it’s clear that the food bank is not seeing a massive drop off in need compared to earlier in the pandemic.

“I’m quite sure that’s in direct relationship to some of the things that are happening in the economy, like inflation,” Tazelaar said. “It’s also a result of some of those government programs, where they provided enhanced supplementary nutrition program benefits, they were providing enhanced unemployment benefits, a moratorium on evictions. … A lot of those programs have ended, and that is putting additional strain on the folks that we support.”

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The Fed and some economists prefer to focus on a measure of inflation known as “core inflation,” which strips away more volatile categories like food and energy. But even that gauge came in hotter than expected, and reflected added strain in peoples’ everyday lives. Costs for housing, medical care, new cars and household furnishings were all up compared with the month before. Prices for water and trash collection services, hospital services and prescription drugs also picked up.

“We’re seeing services that aren’t housing, that aren’t energy services, that the inflation rate is picking up, and that worries people because that indicates higher entrenched inflation,” Stevenson said.

There were some exceptions. The gasoline index dropped 10.6 percent as prices at the pump fell off their summer highs. Costs for airfares and used cars also dropped.

Before the latest inflation report, markets had already expected the Fed to hike rates by three-quarters of a percentage point at its policy meeting next week. That now appears to be fully locked in.

Americans are finally feeling better about the economy

Still, the fight against inflation brings heavy consequences. If the economy slows too quickly, it could slip into a recession and millions of Americans could lose their jobs. Still, the Fed has sent a clear message: It is pressing on.

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Fed Chair Jerome H. Powell said in a closely watched speech last month. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

GOP seeks midterm reset as inflation, abortion temper ambitions

Inflation is also playing a political role, factoring into the midterm elections. Republicans have said the Biden administration’s economic 2021 stimulus plan made inflation worse. Democrats have countered that this law helped fuel the economic recovery and that inflation is being caused by other factors, such as Russia’s February invasion of Ukraine. This summer, surging gas prices caused consumer sentiment — and Biden’s approval ratings — to plummet. But gas prices have been on a steady decline since June, falling from $5 per gallon on average to Tuesday’s recent low of $3.70, according to AAA.

“The fact that core [inflation] came in above expectations is just a reminder that price pressure remains unacceptably high, and that the president’s three-tiered approach is as relevant as ever,” Jared Bernstein, a member of Biden’s Council of Economic Advisers, told The Post. “Fed independence, doing what we can to help family budgets, and deficit reduction.”

Republicans have been looking to frame their midterm political message around inflation as they vie for control of the House and Senate. The effectiveness of that strategy is unclear, especially as gas prices have consistently fallen from their summer highs and the job market is still cranking.

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Americans are beginning to feel better about the economy, and consumer sentiment, which collapsed in June, has been inching up. Lynn Farrell, president and owner of Chicago-based Windy City Travel, said business is booming, especially on luxury travel. People want to fly first class after long-delayed vacations. Farrell will put together safari packages for clients seeking even more extravagant trips.

Airfares have come down from their summer surges, Farrell said. And for those who can afford it, sheer excitement is cutting through inflation’s toll.

“Travel is such an interesting barometer on consumer confidence,” Farrell said, en route to Chicago from a staff trip in Cancún. “We see that when consumers start to get a little bit anxious, the booking windows shorten, or people don’t book travel out as far. … But travel may actually escape a lot of what’s happening in the economy because there’s such pent-up demand.

Laura Reiley contributed to this report.