Inflation Eats Into Wages

The Consumer Price Index (CPI) rose a more-than-expected 0.2% in July and 2.9% compared to a year ago. That was the highest year-over-year pace since hitting 3% earlier in the year; the increase wiped out the 2.7% gain in average hourly earnings for the month. Energy prices declined in July but remained higher from a year ago.

Food prices moved up at grocery stores and restaurants. One problem is the high cost of transportation; shipping costs have surged. We also saw a spurt in airfares over the month on a record holiday season. That helped the airlines to boost their fares, which accounted for an unusual portion of the overall increase but can be volatile.

Core CPI (excluding food and energy) also rose 0.2% in July and 2.4% from a year ago. The rise in new vehicle prices is more notable as vehicle producers complain that steel and aluminum prices are crimping their margins and forcing them to announce price hikes. Higher prices for new vehicles have made used vehicles more attractive and boosted prices as well. Shelter and hospital costs rose but other medical costs including prescriptions decreased. Apparel prices fell in July but will move higher if the president follows through on his threat to levy additional tariffs on $200 billion of Chinese goods.

Bottom Line
Inflation remains on the high end of what the Federal Reserve finds acceptable, which means another rate hike in September. The influence of tariffs on Fed policy is more complex because they take a toll on purchasing power and wages at the same time that they raise inflation.

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