Inflation eating into incomes as basics rise

US consumers may be getting more miles out of a gallon of gasoline but they're also paying much more to put food on the table, a report released on Tuesday shows.

Food prices surged 11.4 percent in August over the same month in 2021, the largest 12-month increase in the United States since May 1979, according to the Labor Department's consumer price index report. Last month, food prices rose 0.8 percent, with the cost of food consumed at home climbing 0.7 percent.

Though consumers got some relief from a 10.6 percent decline in gasoline prices from a record above $5 a gallon in June, to $3.71 currently, they also are paying more for rent, healthcare, electricity and natural gas.

The report showed that inflation increased by 8.3 percent in August year over year, higher than expected.

The news will likely lock in another interest rate rise of 0.75 percentage point by the Federal Reserve next week. The central bank's target inflation rate is 2 percent.

That bearish prospect of more rate hikes also pummeled the stock market, sending the benchmark Dow Jones Industrial Average down by 1,276 points, or just under 4 percent, on Tuesday. The S&P 500 Index dropped 178 points, or 4.3 percent, while the tech-laden Nasdaq took the biggest hit－down 5.2 percent－after falling more than 630 points.

Some economists now expect the Fed to raise its benchmark short-term rate, currently in a range of 2.25 percent to 2.5 percent, to 4.5 percent or higher by early next year. That would make it even harder for the central bank to meet its goal of achieving a "soft landing" without causing a recession.

"This was a disappointing report," said Laura Rosner-Warburton, senior economist at Macro-Policy Perspectives. "It raises the risk of higher interest rates and a hard landing for the economy."

The annual CPI has remained above 8 percent for six straight months. It was up 8.5 percent in July and 9.1 percent in June, the latter the biggest gain since November 1981.

The average household is spending $460 more each month to buy the same basket of goods and services as last year, Ryan Sweet, senior director of economic research at Moody's Analytics, told The Wall Street Journal.

'Big burden'

"That's a big burden, particularly on lower-income households. That's one reason the Fed is laser-focused on getting inflation down," he said.

Brad Botwin, a retired federal worker in Rockville, Maryland, told the newspaper that grocery prices are "shocking".

US President Joe Biden said on Tuesday it would "take more time and resolve to bring inflation down" and cited the recently passed Inflation Reduction Act aimed at lowering the cost of healthcare, prescription drugs and energy.

He later celebrated the passage of that $737 billion legislation－which includes nearly $400 billion for environmental programs, including tax credits of up to $7,000 to buy electric vehicles－on the White House South Lawn with other prominent Democrats.

"I believe Republicans could have and should have joined us on this bill as well," Biden said of the bill that got no GOP support. "After all, this bill cut costs for families to help reduce inflation at the kitchen table."

In a tweet, Senate Minority Leader Mitch McConnell wrote: "You can't make it up: Hours after this terrible inflation report, the White House is hosting an 'inflation reduction' celebration. Democrats have spent our economy into disaster and now they're partying while families pay. They could not look more out of touch if they tried."

The inflation act's spending is offset by new taxes on corporations, including a minimum 15 percent corporate tax and increased Internal Revenue Service tax enforcement. It also allows the health program Medicare to directly negotiate drug prices.

The law could potentially reduce inflation because it would lower annual budget deficits by $300 billion over 10 years.

But by partially forgiving student debt in an August executive order, Biden likely has erased those deficit savings, according to the Committee for a Responsible Federal Budget. An analysis by the fiscal watchdog estimates that the order on student debt would cost roughly $500 billion over 10 years, "completely eliminating any disinflationary benefit".

As for current inflation, the nonpartisan Congressional Budget Office last month judged the bill would have a "negligible" effect on prices into 2023.

The University of Pennsylvania's Penn Wharton Budget Model said "the impact on inflation is statistically indistinguishable from zero "over the next decade.

Agencies contributed to this story.