Economic Forecasts

Inflation Is Not Done Yet and Neither Is the Fed

Kiplinger’s latest forecast on inflation

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Falling prices at the gas pump gave consumers a bit of price relief in July, as well as lowering the overall inflation rate to 8.5% from 9.1% in June. A few other price categories showed easing: Appliance prices are coming down, along with sporting goods, men’s clothing, car rentals and hotel rates. Airfares dropped because of lower fuel costs, and used-car prices edged down. All of these were enough to bring down non-energy, non-food price increases to a moderate level in July.

Inflation is not done yet. Prices continued to rise strongly for basics such as food, rent and new vehicles. There is some evidence that food prices may be moderating after a year’s worth of large monthly increases. But continuing large wage increases at many businesses are likely to keep upward pressure on most prices for some time to come. Expect price inflation at the end of the year to be around 8.0%, down a bit from the peak of 9.1% in June, but still high. Inflation will likely fall to around 3%-4% by the end of next year if the economy slows, as expected.

The Federal Reserve is not done hiking interest rates yet. The lower July inflation report was welcome, of course, and it likely will keep the Fed to its expected half-point hike in September instead of a larger one, but the Fed knows that still-strong wage increases are likely to keep pressure on prices in general. It will likely take several months in a row of smallish price increases before the Fed will feel that the trend has changed.

Print-ready Consumer Price Index chart

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