Inflation is up 8.3% since last year—and more Fed rate hikes are likely looming

The rate of inflation was higher than expected in August, suggesting that inflation is far from under control. Continued interest rate hikes from the Federal Reserve are also likely.

Inflation rose by 0.1% since last month, but is down from its June peak of 9.1%, for a year-over-year rate of 8.3%, according to Labor Department data published Tuesday. 

That's 0.3% higher than many estimates, including a Bloomberg survey of 43 economists that predicted a rate of 8%.

Despite a 10.6% decline in gas prices, increased prices for shelter, food and medical care accounted for the elevated rate of inflation.

This month's report "serves up a gut punch to anyone who's been hoping that inflation would come down substantially," says Mark Hamrick, Bankrate's senior economic analyst.

"The implication is that the Federal Reserve has to remain aggressive" with interest rate hikes, he says.

Food prices increased by 0.8% in August, following gains of 1.1% in July and 1% in June. Shelter prices rose 0.7%, following a 0.5% increase in July. Increased costs to medical care also nudged up by 0.7% in August, following a 0.4% increase in July.

Here's how much prices have increased over the past year for certain household goods and services, according to the Labor Department:

• Gas: 25.6% 
• Airline fares: 33.4%
• Electricity: 15.8%
• Food at home: 13.5%
• New vehicles: 10.1%
• Food away from home: 8%
• Used cars and trucks: 7.8%
• Shelter: 6.2%
• Medical care services: 5.6%
• Apparel: 5.1%

How inflation will affect interest rate hikes

With these disappointing inflation numbers, expect interest rate hikes to continue.

In a recent speech, Federal Reserve chairman Jerome Powell reaffirmed the central bank's commitment to reducing inflation, stating that "we will keep at it until we are confident the job is done" and that Fed policy will "bring some pain to households and businesses."

To reduce inflation down to a benchmark target rate of 2%, the Federal Reserve has already implemented four interest rate hikes in 2022, including two consecutive "jumbo" rate hikes of 0.75% in June and July. The federal funds rate is currently 2.25% to 2.50%.

It's widely expected that the Fed will implement another rate hike of 0.75% when the Federal Open Market Committee meets later in September. Beyond that, more rate hikes are likely if the rate of inflation is still not under control.

"The baseline takeaway for consumers and businesses is that interest rates have risen and are very likely headed substantially higher from here," says Hamrick.

While inflation erodes spending power, interest rate hikes make the cost of borrowing more expensive, which can slow down economic growth and ultimately make it harder to find a job. For consumers, it also means that the cost of debt will increase for things like credit cards, auto financing and personal loans.

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