Inflation increase is less than feared, but still 'uncomfortably high'

Inflation didn't rise as much as feared in August, based on the measurement that the Federal Reserve Board prefers, but Virginia economists say a 3.4% increase over a year ago is still "uncomfortably high" as record diesel fuel prices ripple through the economy.

The Personal Consumer Expenditures Index, or PCE, inched up by 0.3% in August from the previous month, while the core inflation rate, minus the cost of fuel and food, rose by 0.2% from July and 3% for the previous 12 months, the U.S. Bureau of Economic Analysis reported on Wednesday.

"They're probably happy it didn't grow by more, but it's uncomfortably high," said Alice Louise Kassens, dean of business, economics and analytics at Roanoke College.

The optimistic view is that the Federal Reserve Board won't feel it necessary to increase the federal lending rate in October for a second consecutive month as inflation settles into a new normal range, even though it remains higher than the 2% annual target that the board's Federal Open Market Committee aims to hit.

"We're just getting back to reality," said Kent Engelke, chief economic strategist and managing director at Capitol Securities Management, Inc. in Richmond. "I believe we're never going to return to 2 percent. We're going to stay at 3.5 to 4 percent."

The more pessimistic view is that record-high diesel prices are going to show up across the economy as higher fuel costs push the prices of groceries and other goods up, and homeowners buy heating oil for the winter.

"I think it's the calm before the storm," said Bob McNab, chairman of economics at Old Dominion University in Norfolk.

Previously, the Consumer Price Index showed the rate of inflation increasing by 0.4% in August from July, and 3.4%. The CPI for September is due on Oct. 14.

Consumer sentiment has fallen to record lows, both nationally and in Virginia, despite robust consumer spending and state sales tax collections that exceeded projections.

The University of Michigan showed consumer sentiment down by double digits in September on its index, reflecting expectations that inflation will rise by 4.6% in the next year, or more than a half-percentage point higher than in August.

"Views of current and year-ahead expected personal finances both weakened about 10% this month, with concerns over high prices continuing to climb," said Joanne Hsu, director of the national consumer survey.

In Virginia, Roanoke College's quarterly consumer survey in August showed sentiment down by nearly 8 percentage points since the last survey in February. Consumer assessment of current household finances reached its lowest point since inflation peaked in mid-2022 during the COVID-19 pandemic. The index of consumer expectations also fell to its lowest level in more than four years.

Kassens, the senior analyst for the Roanoke survey, notices "an interesting juxtaposition" between consumer outlook and behavior.

"People in Virginia show signs that they're really worried, but they're still spending," she said in an interview on Wednesday.

Fuel prices have a big influence on how consumers feel when they answer surveys, she said, but the high price of diesel fuel is more worrying for the economy, which relies on it to transport groceries and other goods to market, as well as raise food and heat homes when the weather turns cold.

"That will eventually have a substantial spillover effect," Kassens said.

Diesel prices set record highs for 17 consecutive days this month before subsiding slightly last week. Diesel prices averaged just under $6.32 a gallon in Virginia on Wednesday, down more than 6 cents a gallon from the record high set on Sept. 22. The average price of regular unleaded gasoline was $4.19 a gallon, down about 4 cents a gallon from the previous week.

McNab, at Old Dominion, doesn't think the economy has registered the full effects of the spike in diesel fuel prices.

"We're going to find out," he said.

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