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What’s going on?

Data out on Tuesday showed US inflation rose less than expected in August, and there are signs it might all be downhill from here.

What does this mean?

There are a cocktail of factors behind America’s rising prices this year: pandemic-related bottlenecks, a sudden rebound in demand, and ongoing government support programs that have more-or-less constantly been pumping cash into the economy. All told, it’s driven consumer prices 5.3% higher in August than the same time last year.

But here’s the thing: that rise is down from July’s 13-year high of 5.4%, while the “core” inflation measure – which leaves out more unstable food and energy prices – eased slightly as well. And that’s a sure(ish) indication that those price rises are finally calming down a bit.

Why should I care?

For markets: Told you so.

This news will come as a relief to the US Federal Reserve (the Fed), which has maintained for a while that high inflation will fizzle out and has, in turn, stuck to its guns on leaving interest rates where they are. And now that the Fed’s decision looks like it’s been vindicated, investors – worried about the damage higher rates could do to stocks – can breathe a little easier too.

The bigger picture: This could still backfire.

Developed countries around the world are feeling the pinch of inflation right now, but the US is getting squeezed most of all. It’s not hard to see why: the US government flooded the country with dollars when it rolled out rescue packages worth 25% of its economy. That’s helped it recover more quickly than most, sure, but it could also mean the US is battling inflation for a lot longer than its rivals are.

Originally Posted on September 14, 2021 – Peakaboo

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