The US economy is facing a double whammy of rising inflation and slowing growth, as the Federal Reserve’s rate hikes and shrinking consumption weigh on the recovery. The latest data from the Bureau of Labor Statistics showed that the consumer price index (CPI), a measure of inflation, rose by 3.7% in August from a year ago, the highest level since September 2022. The increase was driven by a surge in energy prices, which jumped by 10.6% in August from the previous month. Gasoline prices accounted for more than half of the overall inflation rise, as global oil prices soared to 10-month highs amid supply cuts and rising demand.
Core inflation slows down, but still above Fed’s target
The core inflation rate, which excludes volatile food and energy prices, slowed down to 4.3% in August from 4.7% in July, its lowest pace since September 2021. However, it still remains well above the Fed’s target of 2%, indicating that inflationary pressures are not only driven by temporary factors. Some of the main drivers of core inflation include shelter costs, which rose by 5.1% in August from a year ago, hitting a near-record high. The median home price reached $413,800 in June, the second-highest level ever, according to the National Association of Realtors. Home prices cooled slightly to $406,700 in July, but still remain 7.3% higher than a year earlier.
Fed likely to pause rate hikes, but recession risks loom
The Fed has raised interest rates 11 times since December 2021, reaching a range of 5.25% to 5.5%, the highest level in 22 years. The central bank has been trying to tame inflation and prevent the economy from overheating, but its policy has also contributed to slowing down growth and consumer spending. The US economy grew by only 1.6% in the second quarter of 2023, down from 3.1% in the first quarter. Consumer spending, which accounts for about 70% of GDP, increased by only 0.8% in July, the weakest pace since February.
The Fed is expected to pause its rate hikes at its next meeting on September 20, as it waits to see the full effects of its previous actions and assesses the economic outlook. However, some analysts warn that the Fed may have gone too far and too fast with its tightening cycle, and that it may have to reverse course and cut rates if the economy slips into a recession. According to a survey by Bloomberg, the probability of a US recession in the next 12 months has risen to 35%, the highest level since February 2022.
Biden vows to cut energy costs and boost clean energy
President Joe Biden acknowledged the impact of rising gas prices on American households, saying in a statement on Wednesday: “Overall inflation has also fallen substantially over the last year, but I know last month’s increase in gas prices put a strain on family budgets. That’s why I remain laser-focused on cutting energy costs, including by investing in clean energy to bolster our energy security.” Biden has proposed a $3.5 trillion budget plan that includes spending on renewable energy, electric vehicles, and climate change mitigation. However, his plan faces opposition from some moderate Democrats and Republicans in Congress, who argue that it is too costly and would add to the national debt.
