Betting Inflation Will Keep Falling Is Still a Risky Business

livemint.com:

Inflation has cooled, but it will need to get cooler still for Federal Reserve policy makers to start feeling comfortable. Can it? Overall consumer prices rose a seasonally adjusted 0.6% in August from July, the Labor Department reported on Wednesday, putting them 3.7% above their year-earlier level. Much of that monthly gain came from the jump in gasoline prices, though.

Prices excluding food and energy items—the so-called core that economists and central bankers watch to get a better sense of inflation’s underlying trend—rose 0.3% in August from July, putting it 4.3% above its year-ago level. That is still plenty high, and was a bit firmer than economists expected, but for the Fed it still counts as progress. The central bank’s preferred measure of inflation, from the Commerce Department, looks as if it will show core prices up 3.8% in August from a year earlier, JPMorgan Chase economists calculate, down from a multidecade high of 5.4% hit in February of last year.

This reduction in inflation is the major reason why, when policy makers meet next week, they seem all but certain to leave rates on hold. Investors think there probably won’t be any more rate increases coming after next week, either, but that could be a close call: Interest rate futures put the chance of one more hike this year at a bit less than 50%. It is close for a reason: The case for inflation continuing to cool through the end of the year looks good, but there is plenty that could go wrong.

Consider car prices. Pandemic-related disruptions to microchip supplies severely curtailed new-vehicle availability and that sent used-vehicle prices skyward. With microchip supplies normalizing, new-vehicle production has picked up, and used-vehicle prices have