Why inflation in this country is so sticky

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**Kimberly Adams** (0:31)
Why inflation in this country is so sticky.
From Marketplace in Washington, I'm Kimberly Adams. July's reading of PCE, the Personal Consumption Expenditure Price Index, revealed inflation remains elevated. PCE was up 3.7% overall. Ahead of the big economic policy gathering starting today in Jackson Hole, Wyoming, Kansas City Fed President Jeff Schmid told CNBC that inflation is stubborn and sticky. For more on why, I'm joined by Diane Swank, Chief Economist at the tax advisory firm KPMG. Good morning, Diane.

**Diane Swank** (1:07)
Good morning.

**Kimberly Adams** (1:08)
PCE came in yesterday and inflation is staying high.

**Diane Swank** (1:12)
Well, one of the things that's so disturbing about the stickiness of inflation is not just, we've seen the tariff effects that initially occurred largely play out, and that's now just raised the level of prices. So that's no longer pushing up inflation. What the Fed is worried about, the Federal Reserve is worried about is that we've got this underlying inflation, most notably in the service sector. And we can say, yeah, discretionary services, you don't maybe have to go out to eat as much. That's very hard. But I think the more important thing is that we're seeing this massive increase in health care costs and in the cost of insurance. And people are paying that. That comes out of their pocket in terms of their co-pays, in terms of what they pay each month for their insurance, if they have insurance. And that kind of sort of simmering inflation, it hits everything from elder care to child care, which both accelerated last month, and we're seeing the effects of AI as well. And that is in consumer electronics, which went up at their fastest pace on record. They look like a hockey stick in terms of their acceleration. These are all things that the Fed has to worry about more because it's no longer just about a one-time shock. We've had repeated shocks, which in and of itself mimic inflation and are creating what the Federal Reserve is worried about as a muscle memory on inflation. And there are costs that are really holding up along with demand with an aging demographic, this service sector inflation, and this is a service-based economy. So it really puts the Fed in a hard position of having to derail that inflation because now it's hitting consumers in a way that is more systemic. So not only is it compounded over time to make the level of prices too high, but it is still smoldering. And that is something the Fed can't let continue.

**Kimberly Adams** (3:07)
I know we often talk about core PCE, which strips out food and energy because they're so volatile, but energy really is such a big part of the story.

**Diane Swank** (3:16)
It is a big part of the story. Outside of the service sector, you do see some of it in the service sector, but where you see it also is in just about everything you ship. Diesel prices, even though the oil prices have come down, refining capacity is very constrained, and diesel prices are near a record high. And that filters into everything that is shipped. And it's hard to escape those sort of additional feeds that get put onto anything that's produced and shipped. It also is affecting farmers very hard, which means it gets into the cost of food. And this is at a time when many big box retailers are using their tariff refunds to reduce prices a bit, to try to ease some of the pain for consumers and increase their business, because they've seen actually a fall off from low and middle income households in what they spend on food because of the inflation that we've already experienced.

**Kimberly Adams** (4:09)
Diane Swank is chief economist at the tax and advising firm KPMG. Thank you, Diane.

**Diane Swank** (4:15)
Thank you.

**Kimberly Adams** (4:16)
And a note from us. Earlier this morning, we ran a story about the potential impact of Canadian tariffs on American seafood. That story was out of date and we regret the error. The Canadian Department of Finance announced late last night that it had removed seafood and fish products from the list of counter tariffs on US goods. A statement said that while this adjustment has been made, they are, quote, maintaining dollar for dollar and rate for rate response to US products. Let's check the markets. The Dow is up 49 points. That's less than a tenth of a percent. The S&P 500 is up 4 tenths percent and the NASDAQ is up 1 percent.