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Post: : ‘It masked the full perception.’ Falling gas prices may have skewed expectations for August inflation numbers

Investors got a rude awakening with Thursday’s hotter-than-expected inflation numbers, and the decline in gas prices since June may have contributed to their sense of shock.

Markets plummeted after the release of August inflation data, in part because dropping gas prices over the past few months may have lulled people into thinking inflation was cooling faster than it was. It was another reminder of the psychological sway gas prices hold over consumers and investors alike.

Gas prices declined 10.6% from July to August, according to Tuesday’s inflation data. That reaffirmed the price drop drivers have been seeing in recent trips to the pump and it follows a 7.7% decrease from June to July.

But during August, the overall cost of living increased 0.1% and a measure of “core” inflation, which strips out volatile food and energy prices, displayed a sharp 0.6% gain month-over-month. The yearly rate of inflation now stands at 8.3%, the Bureau of Labor Statistics said.

It was a disappointing set of numbers at a time when economists were forecasting a 0.1% decline month-over-month that would have taken the year-over-year rate to 7.9%. Consumers were also expecting more price moderation ahead, including gas costs, according to a Monday consumer expectation survey from the Federal Reserve Bank of New York.

Those expectations were a reminder of the attention people devote to gas prices — which might not give them the best read on where overall costs are going, said AAA spokesman Devin Gladden.

Nationally, a gallon of gas was $3.70 on Tuesday, down seven cents from a week ago and more than 25 cents from a month ago, AAA data showed. This decrease “masked the full perception” of rising consumer costs overall, Gladden said after August’s inflation data release. “The point it underscores is how obsessed people are with gas prices.”

There are certainly good reasons for policymakers and regular drivers to focus on those prices, he said, but it’s just one look at the costs people and businesses face. Rent and groceries both increased 0.7% just in one month.

“Americans saved on gasoline, but paid more for just about everything else in August,” according to Katherine Judge, an economist at CIBC Capital Markets.

“Everyday price signals” play a large role when people anticipate rising costs, according to a March paper surveying academic studies on how inflation expectations take shape.

“Households focus on the price changes of goods they purchase frequently, such as grocery items, rather than the price changes of a representative consumption bundle when forming their inflation expectations,” said the authors at Boston College, University of California, Berkeley and the University of Chicago.

Falling gas prices may be top of mind for many people, but it can be easy to overlook the costs of diesel fuel, which play a key role in consumer prices, said Patrick De Haan, head of petroleum analysis at GasBuddy. The cost of diesel — which fuels the tractor trailers, trains and heavy duty transport getting goods to stores — is down 13.8% since mid-June, while gas is down 27% in that time, he noted.

“Diesel is not as much in the limelight as gasoline,” and it may be one “missing piece” to remember as people try getting their heads around why costs keep climbing, De Haan said.

A gallon of diesel was $5.03 as of Monday, up from $3.37 a year ago, according to the U.S. Energy Information Administration.

It’s an understatement to say investors haven’t been taking the news well about August’s inflation numbers, the signs of persistent price growth — and what central banks will have to do to thwart that.

The Dow Jones Industrial Average

dropped roughly 875 points, or 2.7%, by early Tuesday afternoon. while the S&P 500

dropped roughly 125 points, 3%, and the Nasdaq Composite

fell more than 475 points, nearly 4%.

“The correction in gas prices in August was significant, with prices at the pump down 25% since their most recent June peak,” Gregory Daco, chief economist at EY Parthenon, said in a note. But other energy costs for electricity and natural gas rose strongly, he said.

Energy prices should cool off in the fall, which should help pull down top-line inflation numbers, Daco said. But August’s numbers show inflation is “broad-based” and the cooler prices will be “very gradual,” he noted.

It also shows that the Federal Reserve still has a lot of work ahead to fight inflation with higher interest rates, said Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income and head of its Global Allocation Investment Team.

So paying for gas, whatever the price, could be more costly if drivers put it on a credit card. When the Fed raises interest rates, one consequence is higher credit card APRs.

“Overall, today was a surprising day against the trend of what had appeared to be some moderation across most indicators of growth and pricing pressure, so the Fed’s job is clearly not finished,” Rieder said.

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