Inflation is beginning to ease meaningfully for American consumers. Gas is cheaper, eggs are about half the price they were in January and prices on a wide range of products aren’t climbing as fast anymore.
But at least one person hasn’t expressed relief yet: Federal Reserve Chairman Jerome H. Powell.
The Fed has spent the past 15 months locked in an aggressive war against inflation, raising interest rates above 5 percent in an effort to bring price increases back to a more normal pace. Last week its officials announced they were skipping a rate hike in June, giving themselves more time to see how the changes already implemented in the economy are faring.
But Mr Powell insisted it was too early to declare victory in the fight against rapid price increases.
The reason: While less expensive gas and slower grocery price adjustments have helped overall inflation fall from its four-decade peak last summer, food and fuel costs remain high. It obscures underlying trends. And a measure of “core” inflation that excludes food and fuel is showing surprising staying power, as purchases ranging from dental care and hairstyling to education and car insurance continue to rise sharply in price. .
Last week, Fed officials sharply flagged their forecast for how high core inflation will be in late 2023. They now see it at 3.9 percent, up from the 3.6 percent they projected in March and nearly double their 2 percent inflation target.
The economic picture is, in essence, playing out on a split screen. While the sharpest increase in prices for consumers appears to be over — a relief for many, and a development that President Biden and his advisers have celebrated — Fed policymakers and many outside economists see continued reasons for concern. Amidst subtle signs that inflation may be around and the surprising resilience of the US economy, they believe central bankers will need to act on demand to calm growth and prevent abnormally high price increases from becoming permanent. There may be a need for reining.
“The big picture: We’re making progress, but progress is slower than expected,” said Kristin J. Forbes, an economist at the Massachusetts Institute of Technology and a former Bank of England policymaker. “Inflation is a bit more stubborn than we expected.”
A fresh Consumer Price Index inflation report last week showed that inflation continued to ease sharply in May on an aggregate basis. The measure helps feed into the Fed’s preferred measure, the personal consumption expenditure index, which it uses to define its 2 percent target. The new PCE figures will be released on June 30.
White House officials, who have spent months on the defensive about the role the pandemic played in demand and price increases under Biden, have enthusiastically welcomed the recent cooling in inflation.
“We’ve seen a significant reduction in inflation, more than 50 percent,” Lael Brainard, director of the White House National Economic Council, said in an interview. He said the current trajectory on inflation offered reasons for optimism that it could slide back to normal even as the economy slows, and expressed hope that there would be a big jump in unemployment to crush it. won’t be needed – something that has historically accompanied the Fed’s campaigns to beat inflation.
“The employment picture is very durable,” she said.
But many economists are less optimistic. This is partly because most of the factors that have helped inflation fall so far have been widely speculated as the low-hanging fruit of deflation.
Supply chains were shaken by the pandemic and have since recovered, slowing the rise in commodity prices. The oil price boom linked to the war in Ukraine has faded.
And there could be more to come: Starting in 2021, rents are slated to boom as people move out on their own or relocate amid the pandemic. They have calmed since landlords found that tenant demand was not strong enough to tolerate the sometimes high prices, and the moderation is slowly feeding into official inflation data.
What is relatively rapid price growth in services outside housing. This is a broad category, and includes purchases that are labor-intensive, such as hospital care, school tuition, and sports tickets. These prices rise when wages rise, as employers try to cover their higher costs and because consumers who are earning more have the ability to pay more without being pulled back.
“The big action is behind us,” said Olivier Blanchard, former chief economist at the International Monetary Fund, who is now at the Peterson Institute. “What Keeps the Pressure on Wages.”
During a news conference last week, Mr. Powell said that “you’re not seeing a lot of progress right now” in the measure of inflation excluding food and energy, stressing that “getting wage inflation back to a level that that is sustainable” be an important part of reducing the remaining price increase.
There are early indications that a recession is underway in the labor market. The Employment Cost Index measure of wages, which the Fed watches closely, is climbing Far faster than before the pandemic but has slowed from a mid-2022 peak. a measure of average hourly earnings has also come down significantly. And jobless claims have increased in recent weeks.
But hiring remains strong, and the unemployment rate is low – which is why economists are trying to figure out whether the economy is cooling down enough to ensure that inflation will return to normal at all. .
Silas Scarbrough, 42, has seen both characteristics of today’s economy: rapid wage growth and rapid inflation. Mr. Scarbrough works as an analyst for a homebuilder in Sacramento, and he said his skills were in such high demand that he could get a new job faster if he wanted to. She got a 33 per cent hike when she joined the company two years ago and since then her salary has increased further.
Still, he is racking up credit card debt because of high inflation and because he and his family spend more than they did before the pandemic. They’ve been to Disneyland twice in the last six months and regularly overeat.
“It’s something about: You only live once,” he explained.
He said he feels fine about spending more than his budget, since he bought a home at the start of the pandemic and now has about $100,000 in equity. In fact, he’s not even worrying that much about inflation these days – it was far more important to him when gas prices were skyrocketing.
“That was the time when I really felt that inflation was eating away at our budget,” Mr Scarbrough said. “I feel more comfortable with it now. I don’t think about it every day.”
Fed officials are not comfortable yet, and they could do more to moderate the price rise. Officials last week predicted they would raise interest rates this year to 5.6 percent, a two more quarter-point rate hike that would raise rates to their highest level since 2000.
Investors doubt that will happen. Given the recent cooling in inflation and signs of cracking in the job market, they expect another rate hike in July – and then a one-time rate cut early next year. But if that bet turns out to be wrong, the next phase of the fight against inflation could be even more painful.
As higher borrowing costs lead consumers and firms to pull back, this is expected to translate into less hiring and fewer job opportunities for people like Mr Scarbrough. Recession can put some people completely out of work.
Fed policymakers have projected that unemployment will reach 4.5 percent by the end of next year — slightly higher than 3.7 percent now, but much lower than historically. But Mr. Blanchard believes a one percentage point increase in the unemployment rate may be needed “and maybe more.”
Jason Furman, an economist at Harvard, said he thought the unemployment rate could rise even higher. While this is not his forecast, he said it was “possible” in a worst-case scenario that something like 10 percent unemployment would be needed for inflation to fully normalize. In the worst-case scenario of the 2009 recession, high unemployment rose and inflation came down to about two percent, he said.
In any case, Mr. Furman cautioned against drawing too early conclusions about the path forward for inflation based on progress so far.
“People have been declaring victory over inflation prematurely to the point of insanity,” he said.