Why Falling Gas Prices Haven’t Outrun Inflation: NPR

In terms of inflation, the good news is that gas prices are falling. The bad news is that other expenses continue to climb faster than wages, and that’s putting a strain on many family budgets across the country.

The Labor Department said Wednesday Annual inflation eased to 8.5% in July, from 9.1% the month before. Lower gasoline prices offset higher prices for other commodities, leaving the consumer price index unchanged between June and July.

After hitting a record high of $5.01 a gallon in June, the average price of gasoline has fallen sharply. According to the AAAA gallon hit $4.01 on Wednesday.

“Sure, it’s better than $5,” says Spencer Sutton of Newport, Pa. “But compared to what we paid before the war in Ukraine started, it still costs a lot.”

Sutton is also concerned about the high cost of groceries and housing in particular. To save on expenses while his wife finished nursing school, the couple moved in with his mother.

“As a 30-year-old millennial, I didn’t think I’d still be living with my mom, my brother and my wife,” Sutton says. “It’s certainly not the best arrangement, but in today’s day and age with what’s going on, you’ve got to do what you’ve got to do.”

Why focus on core inflation?

Household spending – up 5.7% from a year ago – is a growing factor behind inflation. Rising rents and housing prices are reflected only gradually in labor department data, and those costs continue to outpace volatile food and energy prices.

“This is the Federal Reserve moving in the wrong direction,” said Diane Swank, chief economist at KPMG. “We’re seeing some things come down in price, which is good. But the other shoe that needs to be cut is the core inflation number.”

Annual core inflation excluding volatile food and energy prices was 5.9% in July. Core prices rose just 0.3% between June and July – the smallest increase in ten months.

Investors welcomed signs that inflation may be cooling. The Dow Jones Industrial Average rose more than 450 points in the first hour of trading. But prices are still rising faster than wages, reducing workers’ purchasing power.

Penelope Valdespino moved this year from a retail job to a higher-paying position in a school district in San Antonio, Texas. However, her huge salary is quickly eroded by rising prices.

“Eventually I went to another job and, yes, I was going to make $3 or $4 an hour more,” he says. “That’s great, but it’s still a challenge to catch everything and keep it organized in this climate.”

Valdespino welcomes the drop in petrol prices, but says he is still cautious about curbing unnecessary car journeys. She watches her pennies at the grocery store, where prices are up 13.1% from a year ago.

“We’re very careful about how much meat we buy,” he says.

Wages are not keeping pace with inflation

Sutton, who works for a dental insurance company, also got a raise this year, but says the money doesn’t stretch as far as it used to.

“It is not enough to fight inflation and rising food prices,” he says. “It’s hard to get through the end of the week before you get paid, you don’t have food, and you’re digging through the freezer to try to find something.”

Average wages in July rose 5.2% from a year earlier – well below the rate of inflation.

Higher wages also complicate the Federal Reserve’s efforts to fight inflation.

“We know how painful inflation can be, especially for people who are living paycheck to paycheck,” Federal Reserve Chairman Jerome Powell said last month.

The central bank tries to control rising prices by raising interest rates sharply in an attempt to reduce demand.

But after last week, the central bank’s job is more challenging A better-than-expected report on the labor marketEmployers added 528,000 jobs last month.

“If those numbers are to be believed, we generated more than half a million new checks in July, which is additional revenue,” says Swank at KPMG. “Even if individuals feel they’re losing ground relative to inflation, that extra income supports demand,” keeping upward pressure on prices.

Before Wednesday’s inflation report, many observers expected the central bank to approve a 0.75 percentage point increase at its next meeting in September. June And July. After the report, Oddsmakers are leaning toward a small rate increase 0.5 percentage points.

Lower gas prices have another benefit

A sharp fall in petrol prices will help curb inflation in another way.

The drop in pump prices not only lowered July’s headline inflation rate, but also seemed to ease public concerns. the future inflammation

This is important because if people believe that prices will spiral out of control, it becomes a self-fulfilling prophecy.

A new survey Federal Reserve Bank of New York Between June and July, people’s expectations of inflation, one year and three years ahead, fell sharply, just as gas prices fell.

While other expenses like food and rent make up a large portion of the typical household budget, gas prices have a bigger impact on people’s attitudes about the economy, Swank says.

“Even if you’re not driving, you walk or drive by a gas station,” Swank says. “It’s something we all pay attention to front and center every day.”