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The Fed won't raise interest rates despite inflation uptick, some economists say

AILSA CHANG, HOST:

Inflation picked up a little steam last month, largely as a result of rising gas prices. The Labor Department says the overall cost of living in August was up 3.6% from a year ago. That is the biggest annual increase that we have seen all summer. But the Federal Reserve is still expected to hold interest rates steady when policymakers meet next week. NPR's Scott Horsley joins us now. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Ailsa.

CHANG: OK, so inflation was coming down for most of the last year, right? But now it's gone up for two months in a row. How worried should we be?

HORSLEY: You know, it's not what you want to see, but it might not be that big a deal. As you noted, rising gas prices accounted for more than half the monthly jump in the cost of living last month, and that may not continue. We know gas prices bounce both up and down. Preston Caldwell, who's the chief U.S. economist at Morningstar, says gas prices may have a little more room to climb, but he thinks drivers will start to see some relief at the gas pump in the not-too-distant future.

PRESTON CALDWELL: We'll see another month or two, perhaps, of upward pressure on energy prices. But after that, it should run in the opposite direction, I think.

HORSLEY: Gas prices are still lower than they were at this time a year ago and quite a bit lower than they were at their peak last June after the U.S. slapped sanctions on Russia in response to its invasion of Ukraine.

CHANG: Right. OK, and what's happening to other prices?

HORSLEY: You know, it's a really mixed bag. Rent is still going up, although not as fast as it was. Hotel room rates were down last month. Airfares were up after falling in June and July. The rise in airfares was mainly because of higher jet fuel costs. Caldwell says if you strip out that volatile energy component and volatile food prices, we're generally seeing an easing of inflation over the last 12 months.

CALDWELL: This still paints a picture of core inflation returning to normal, and so the Fed will not hike rates in its meeting next week. I think they're probably done hiking for the rest of this year.

HORSLEY: And financial markets generally share that forecast, at least as far as next week's meeting is concerned, although with inflation still well above the Fed's target of 2%, you can't rule out one additional interest rate hike later in the year.

CHANG: Hmm. Well, I understand that one place people are really feeling this inflation is auto insurance. What's going on there?

HORSLEY: Yeah, auto insurance has been a big mover this year. Prices are up more than 19%. That's partly a byproduct of some of the other inflationary forces we've been seeing. You know, it costs more to repair or replace a car these days. The insurance industry also says it's seen more serious accidents since the beginning of the pandemic and more from natural - more damage from natural disasters. Rising insurance premiums are a challenge because, in most states, car owners have to carry auto insurance. I asked California consumer watchdog Harvey Rosenfield what drivers can do to try to cut those expenses.

HARVEY ROSENFIELD: There's not a lot of solace there. I mean, the very first thing you got to do is shop around because there are, very often, better deals to be had. Some insurers charge more than others. The next thing to do is make sure that they've accurately assessed you as an individual policyholder.

HORSLEY: You know, some insurance companies will give you a discount if you download an app on your phone so they can track your driving habits. Of course, there's a privacy trade-off there.

CHANG: Yeah.

HORSLEY: Often, it pays to bundle your home and auto insurance. There is some good news - used car prices were down last month. New car prices were up again, though, and we could see new car prices go higher if there's an extended strike against the Detroit automakers.

CHANG: That is NPR's Scott Horsley. Thank you, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.