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August CPI Report Shows Cooling Inflation

The run-up in consumer prices cooled slightly in August, a sign that although inflation is higher than normal, the White House and Federal Reserve may be beginning to see the slowdown in price gains they have been hoping for.

Policymakers have consistently argued that this year’s burst of inflation has been tied to pandemic-related quirks and should prove temporary, and most economists agree that prices will climb more slowly as businesses adjust and supply chains return to normal. The major question hanging over the economy’s future has been how much and how quickly the inflationary burst will fade.

The Consumer Price Index rose 5.3 percent in August, from the prior year, data released by the Labor Department on Tuesday showed. That’s a slightly slower annual pace than the 5.4 percent increase in July. On a monthly basis, price gains moderated to a 0.3 percent increase between July and August, down from 0.5 percent the prior month and a bigger slowdown than economists in a Bloomberg survey had expected.

The news on core inflation, which strips out volatile food and fuel prices to try to get a cleaner read of underlying price trends, was even more encouraging for policymakers hoping to see signs of fading pressures. That index picked up by 0.1 percent on the month, and 4 percent over the past year — down from 0.3 percent and 4.3 percent in the July report.

Inflation has been running hot this year as the economy reopens from the pandemic, causing airline fares and hotel room rates to bounce back from depressed levels. At the same time, supply chain snarls have pushed shipping costs higher, feeding into prices for all sorts of products, from lumber to toys. Labor costs have climbed for some companies, pushing inflation higher around the edges, and rent prices are rising again as workers return to cities after fleeing during 2020.

But policymakers are betting that annual price gains will settle down toward the Fed’s 2 percent average target over time. Officials define their target using a different index than what was released on Tuesday, a measure known as the Personal Consumption Expenditures index. That gauge has also picked up this year, but by less, climbing by 4.2 percent in the year through July.

“The rapid reopening of the economy has brought a sharp run-up in inflation,” Jerome H. Powell, the Fed chair, acknowledged in a speech last month. But “the baseline outlook is for continued progress toward maximum employment, with inflation returning to levels consistent with our goal of inflation averaging 2 percent over time.”

Central bankers are hoping that quick inflation will dissipate before consumers learn to expect steadily higher prices — which can become a self-fulfilling prophecy as shoppers accept loftier price tags and workers demand higher pay. A closely watched tracker of household inflation outlooks released by the Federal Reserve Bank of New York on Monday showed that expectations rocketed up to 5.2 percent in the short term and 4 percent in the medium term.

That data point is disquieting, but market-based inflation expectations have been relatively stable after moving up earlier this year, and real-world prices may begin to ease in important categories in the months ahead.

Price indexes for airline fares, used cars, and car insurance all declined in August, the Labor Department report showed.

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