U.S. inflation is near its highest level in four decades, fueled by rising food, housing and energy costs plaguing economies globally. Gasoline prices hit a record $5 a gallon in June. They soon subsided, but inflation overall still runs four times the 2 percent rate economists want. Inflation remains the top economic issue and, with fall’s midterm elections approaching, a top political one. Policymakers trying to tame it face events largely beyond their control: a pandemic and Russia’s invasion of Ukraine. These breed supply shortages that raise costs even as the U.S. economy runs strong, with unemployment at 50-year lows and consumer spending steady. The Federal Reserve has raised interest rates to make borrowing costlier in the hope of slowing demand. Will it overshoot, sparking a recession and job loss while failing to increase supplies?

Average U.S. gasoline prices reached $5 a gallon in June, helping to drive the overall inflation rate up. Gasoline prices receded somewhat later in the summer, but higher prices for things such as rent and restaurant meals kept the inflation rate elevated. (Getty Images/Win McNamee)

The U.S. inflation rate was at 8.3 percent in August, down a bit from the previous month but still close to a 40-year high, according to data from the U.S. Bureau of Labor Statistics. Gasoline prices, which had reached $5 a gallon on average in June, continued to fall — but this was more than offset by increases in other costs, such as rents, medical care and eating out at restaurants. The data surprised many economists, who had expected a greater decline, and displeased investors. 1

The nation’s central bank, led by Federal Reserve Chair Jerome Powell, raised its benchmark interest rate by three-fourths of a percentage point in June, the Fed’s biggest one-time increase in almost 30 years, and then by that amount in July and again in September. The September hike was the Fed’s fifth increase in 2022 and followed two years of zero changes as the economy recovered from the recession at the start of the COVID-19 pandemic. The spate of increases marks the most frantic Fed activity since the 2007-09 downturn, when the central bank faced the opposite of today’s problem and repeatedly lowered rates to spark buying as the economy imploded. The slowed inflation rate suggests the Fed’s interest rate hikes are working, but the problem of rising consumer prices for basics is hardly over. 2