Inflation trumps wage gains

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Sabri Benishur (1:02)

In the battle between inflation and our paychecks, guess who's winning? From American Public Media, this is Marketplace.

In New York, I'm Sabri Benishur. In for Kai Rizdal. It is Friday, September 11th. Good to have you along. So the big news, the big economic news this morning, is that inflation got worse in August. We went from prices increasing by just a tenth of a percent in July to four tenths percent increase in August. And even if you take gas and food out of the picture, prices still increased more quickly in August. And now the Federal Reserve has to figure out what it's gonna do about it. So let's get into that and the week's other news with Sudeep Reddy, who's at MS Now, and Kate Davidson, who's at Bloomberg. Hello.

Hi, Sabir.

Kate Davidson (1:57)

Hi, hello.

Sabri Benishur (1:59)

So I wanna just read you this comment from an inflation analyst I follow, Omer Sharif.

He says, for the Fed, it is time to put up or shut up. You cannot give a speech like you did at Jackson Hole and not support a rate hike at the next meeting. You will either have to back up those words or end up as the boy who cried wolf. Kate, thoughts?

Kate Davidson (2:24)

Yeah, we put that one high up in our story for sure, about the implications for the Fed.

I think it's pretty succinct. What did we hear from Kevin Warsh and Jackson Hole? He gave a much more, I guess, decisive speech. Traders, investors were really looking for him to go a little bit further and not just saying, yeah, we're going to rein in inflation, we're going to get it under control, but really to make clear that they're willing to raise rates. And so he did that. He essentially said that the Fed would have work to do if it couldn't be confident that underlying inflation was moving toward the Fed's goal of 2 percent. And he also said at sufficient speed. So in other words, they're not going to wait around a long time. They want to see it improving quickly. And so you certainly did not see that in any of the inflation data this week. The Fed is going to meet for two days next week and they have a decision to make. And so I think we heard from a lot of economists today and certainly the market reaction seem to agree that it will be difficult to justify holding rates steady next week based on what we've heard from Warsh and others that if inflation doesn't get better, they have to raise rates.

Sabri Benishur (3:31)

If a lot of the inflation that we are seeing is either directly from gas and diesel prices or indirectly in the sectors that use gas or diesel or fuel, what can raising interest rates do about that kind of inflation, Sudeep?

Sudeep Reddy (3:51)

We're in this very strange moment where inflation is obviously elevated. It's been elevated for many years.

It is becoming a credibility problem for the Fed and a credibility problem in markets. There are plenty of investors in the bond market who are wondering whether the Fed is ever going to take action against inflation. So there's a credibility issue at stake here. I think one reason we saw some surprising market reaction right out of the CPI report this morning, even though we knew it was going to lead to a Fed rate hike, was at least there is some certainty here. The bond traders are just like us. They want to know what's going to happen next. They want to feel comforted that somebody actually has their hands firmly on the steering wheel. There's something to be said there. Obviously, the fact that so much of this is coming due to energy is the core of the argument on the other side. That's certainly what Scott Bessent, the Treasury Secretary is making and what lots of people in the Trump administration want to make. That's just like, wait this out. Don't overreact. You're going to constrain demand across the economy. But there's no sign that higher interest rates are actually really holding back the economy at large. Obviously, certain sectors will get hit by it.