WASHINGTON -- Lower gas costs slowed U.S. inflation for a second straight month in August, but most other prices across the economy kept rising - evidence that inflation remains a heavy burden for American households.
Consumer prices surged 8.3% last month compared with a year earlier, the government said Tuesday, down from an 8.5% jump in July and a four-decade high of 9.1% in June. On a monthly basis, prices rose 0.1%, after a flat reading in July.
But excluding the volatile food and energy categories, so-called core prices jumped 0.6% from July to August - up sharply from 0.3% the previous month and dashing hopes, for now, that core prices would moderate. And in the year ending in August, core prices jumped 6.3%, up from 5.9% in July. Rents, medical care services and new cars all grew more expensive last month.
Core prices typically provide a clearer read on where costs are headed than overall inflation. Stock prices tumbled and bond yields jumped on the worse-than-expected core figures, with many investors fearful that the Federal Reserve will turn even more aggressive in its drive to curb inflation. The Dow Jones industrial average sank more than 800 points in early trading.
Further Fed rate hikes could weaken growth so much as to push the economy into a recession. Some economists now expect the Fed to raise its benchmark short-term rate, currently in a range of 2.25% to 2.5%, to 4.5% or higher. That would make it even harder for the central bank to meet its goal of achieving a "soft landing, whereby it tames inflation without causing a recession.
"This was a disappointing report," said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. "It raises the risk of higher interest rates and a hard landing for the economy."
Chair Jerome Powell is expected to announce another big increase in the Fed's key rate next week, which will lead to higher costs for many consumer and business loans.
Inflation is higher than many Americans have ever experienced, escalating families' grocery bills, rents and utility costs, among other expenses. It has deepened gloom about the economy despite strong job growth and low unemployment.
Grocery prices continue to rise rapidly, jumping 0.7% from July to August. In the past year, they have soared 13.5% - the biggest 12-month increase since 1979.
Chicken prices have jumped nearly 17% in the past year. And egg prices surged 2.9% just in August from July and are up nearly 40% from a year ago.
Republicans have sought to make inflation a central issue in the midterm congressional elections. They blame President Joe Biden's $1.9 trillion stimulus package passed last year for much of the increase. Many economists generally agree, though they say that snarled supply chains, Russia's invasion of Ukraine and widespread shortages of items like semiconductors have also been key factors in the inflation surge.
At the same time, the drop in gas prices - for consumers, perhaps the most visible barometer of inflation - could bolster Democrats' prospects in the midterm elections. It may already have contributed to slightly higher public approval ratings for Biden.
In his speeches, Biden has generally stopped referring to the impact of inflation on family budgets. He has instead highlighted his administration's recent legislative accomplishments, including a law enacted last month that's intended to reduce pharmaceutical prices and fight climate change.
Nationally, the average cost of a gallon of gas has dropped to $3.71, down from just above $5 in mid-June.
But the prices of many other goods are still rising even as supply chain snarls unravel, Rosner-Warburton pointed out. Furniture, rugs and new cars grew more expensive last month, suggesting that companies are still raising prices in the face of strong consumer demand.
"Companies are still putting through large price increases for those goods, and that's problematic," she said. It means the Fed will likely have to work harder to quash consumer spending through higher rates.
Elaine Buckberg, chief economist at General Motors, said the pandemic disruptions to overseas production of semiconductors, which have slowed auto output, have significantly dissipated and that overall supply chain disruptions have improved about 80% from the worst days of the pandemic.
Yet Americans are still desperate for cars, Buckberg said, which has allowed dealers to keep their markups much higher than pre-pandemic levels.
"Virtually every vehicle that gets to a dealer has already been sold to someone," she said.
Ongoing price increases for raw materials - and labor - have left many small businesses struggling. Some are raising their own prices to keep up, only to then lose customers, according to a survey by Goldman Sachs 10,000 Small Business Voices.
Meaghan Thomas, co-owner of Pinch Spice Market in Louisville, Kentucky, an online spice seller, has avoided raising prices for the past two years but worries that that can't last if inflation worsens.
The price to ship spices from overseas have quadrupled, she said, and she has seen little relief so far despite reports that such costs are declining. The cost of spices, which she and her partner grind and blend in a small factory, have jumped by as much as 25% in the past year. They plan to expand the factory, but have found that the cost of lumber, metal doors and other materials is higher than they expected.
The company's profit margin has been cut by half, Thomas said, but she and her partner think it's important to keep their products affordable. She says larger companies have made inflation worse by raising prices unnecessarily.
"We can hang on for a little bit if all these other companies can stop raising their prices," Thomas said.
Next week, most Fed watchers expect the central bank to announce a third straight three-quarter-point hike, to a range of 3% to 3.25%. The Fed's rapid rate increases - the fastest since the early 1980s - typically lead to higher costs for mortgages, auto loans and business loans, with the goal of slowing growth and reducing inflation.
The average 30-year mortgage rate jumped to nearly 5.9% last week, according to mortgage buyer Freddie Mac, the highest figure in nearly 14 years.
Powell has said the Fed will need to see several months of low inflation readings that suggest price increases are falling back toward its 2% target before it might suspend its rate hikes.
Wages are still rising at a strong pace - before adjusting for inflation - which has elevated demand for apartments as more people move out on their own. A shortage of available houses has also forced more people to keep renting, thereby intensifying competition for apartments.
Rising rents and more expensive services, such as medical care, are also keeping inflation high.