Inflation Report to Reveal Price Moves 08/12 06:18

   Is U.S. inflation stuck at a stubbornly high level or is it steadily cooling?

   WASHINGTON (AP) -- Is U.S. inflation stuck at a stubbornly high level or is 
it steadily cooling?

   The government's latest report on consumer prices, to be released Wednesday, 
should provide some hints. It will be closely watched by the inflation-fighters 
at the Federal Reserve as well as Republicans facing tough midterm elections, 
not to mention consumers still struggling with high grocery prices.

   Americans have grappled with worsening inflation since early last year, 
after tariffs lifted the cost of imported goods. Then this spring, the Iran war 
raised oil and gas costs, pushing inflation to its highest level in three 
years. The AI build out has also increased prices for computer chips and 
electronic equipment. All three trends could end up having only temporary 
effects and if they fade, inflation could drop back to the Federal Reserve's 2% 
target.

   Wednesday's inflation report is expected to show that consumer prices rose 
3.4% in July from a year earlier, according to a survey of economists by data 
provider FactSet. That would be down from 3.5% in June and lower than the 
recent peak of 4.2% in May.

   On a monthly basis, prices are expected to have risen just 0.1% from June to 
July, after they fell in June on sharply lower gas costs.

   Excluding the volatile food and energy categories, core inflation may cool 
for a second month, to 2.5%, down from 2.6% in June, according to FactSet. Core 
prices -- which the Fed pays particularly close attention to -- likely rose 
0.2% from June to July.

   A big reason inflation has cooled in the past couple of months is that gas 
prices fell after a ceasefire was reached in the U.S.-Iran war. Average gas 
prices were lower last month than in June, so that should reduce last month's 
inflation reading. But gas prices rose again in late July and earlier this 
month, meaning inflation could pick up again when August's figures are released 
next month, adding a layer of uncertainty.

   On Wednesday, gas averaged $4.04 a gallon nationwide, 16 cents higher than a 
month ago, according to the motor club AAA.

   Overall, price increases have stayed above the Fed's 2% target for more than 
five years, suggesting that more than temporary factors may be at work. The 
cost of services such as healthcare, restaurant meals, and car maintenance are 
on average rising at more than 3% annually, and they aren't particularly 
sensitive to gas prices or AI investment.

   Rising costs for services often reflect higher wages, as companies charge 
more to offset the cost of higher pay. But incomes aren't growing fast enough 
to sustain inflation, economists note.

   It's a confounding situation that has left many economists -- and Fed 
officials -- seeking more information to determine where inflation is headed.

   "You've got all these things that are just not the way the economy used to 
behave," Diane Swonk, chief economist at KPMG, said.

   For many consumers, years of sharply rising grocery prices have led them to 
adopt a wide range of coping strategies, from comparison shopping, to 
couponing, to cutting back on favorite foods.

   Some retailers, such as Walmart, have responded by rolling back food prices, 
a trend that could have lowered July's inflation figures. Yet many other firms 
are still passing on higher costs.

   Paint company Sherwin-Williams is planning an 8% price increase effective 
Sept. 1 to offset higher raw material costs, CEO Heidi Petz told analysts late 
last month. She said that because of the company's strong relationships with 
suppliers, it was able to delay price increases until now.

   "We are seeing the impact of higher oil and related cost pressures, and we 
expect continued volatility throughout the balance of the year," she said.

   Wednesday's report comes as the Federal Reserve is sharply divided over 
whether it should hike its key interest rate to combat inflation. The Fed kept 
its rate unchanged, at about 3.6%, at a meeting late last month. But the vote 
was 9-3, with three dissenters favoring a rate hike.

   And at a July 29 news conference explaining the decision, chair Kevin Warsh 
was vague about the Fed's next steps, in keeping with his focus on reining in 
the central bank's previous willingness to signal whether it was prepared to 
raise or cut borrowing costs.

   "If inflation continues to be elevated ... interest rates could well be part 
of that solution," he said. "But I wouldn't say it's in isolation."

   Long-term interest rates rose after Warsh's comments, suggesting investors 
worried that inflation could worsen in the coming months and the Fed might not 
lift borrowing costs to fight rising prices.

   Complicating matters, the government said last week that employers had cut 
jobs in July, a sign of potential economic weakness. The Fed typically avoids 
rate hikes when hiring is faltering, because higher borrowing costs could slow 
the economy further.

   Investors now see the odds of a rate hike at the Fed's next meeting in 
September as roughly 50-50, according to CME Fedwatch.