Inflation is starting to ease in a meaningful way for American consumers. Gasoline is cheaper, egg prices are about half what they were in January, and prices for a wide range of products are no longer rising so rapidly.
But at least one person has yet to express relief. That is Federal Reserve Chairman Jerome H. Powell.
The Fed has waged an aggressive war on inflation over the past 15 months, raising interest rates above 5% to return inflation to a more normal pace. Last week, government officials announced they would forgo a rate hike in June to give more time to see how the changes already enacted would affect the economy as a whole.
But Mr. Powell stressed that it was too early to declare victory in the fight against sharp inflation.
Why: Lower gas prices and slower food price adjustments have pushed overall inflation down from its 40-year peak last summer, while food and fuel costs tend to jump significantly. It obscures underlying trends. And as the prices of everything from dentistry and hairstyling to education to car insurance continue to rise rapidly, the food and fuel-stripping “core” inflation measures have shown remarkable staying power.
Fed officials last week significantly raised their expectations for how high core inflation will end 2023. We now see 3.9%, higher than our March forecast of 3.6% and almost double our 2% inflation target.
So the economic situation is playing out like a split screen. For consumers, the steepest price rise appears to be over, a relief for many, with President Biden and his advisers celebrating the development, but Fed policymakers and many outsiders Economists continue to see reason for concern. Between the nuanced signs that inflation may persist and the remarkable resilience of the U.S. economy, central bankers are pushing to curb growth and curb demand to prevent abnormal price increases from becoming permanent. They think they may need to work harder.
“The big picture: We’re making progress, but progress is slower than expected,” said Christine J. Forbes, an economist at the Massachusetts Institute of Technology and a former policymaker at the Bank of England. “Inflation is a little more stubborn than we expected.”
Fresh consumer price index Last week’s inflation report showed that inflation continued to slow significantly across the board in May. This metric helps feed into the Fed’s preferred metric, the Personal Consumption Expenditure Index, which it uses to define its 2% target. New PCE figures will be announced on June 30th.
White House officials have been on the defensive for months about the role that pandemic spending under Mr. Biden has played in stimulating demand and inflation, but have enthusiastically welcomed the recent cooling in inflation.
“Inflation has come down a lot, over 50%,” White House National Economic Council Chairman Lael Brainard said in an interview. He added that the current trajectory of inflation provides reason for optimism that even if the economy slows, it could return to normal fairly quickly, noting that defeating inflation will not necessarily require a significant rise in unemployment. is not necessary, and expressed the hope that this has historically been associated with Fed policy. to stop inflation.
“The employment situation is very sustainable,” she says.
But many economists aren’t so optimistic. Part of the reason is that most of the factors that have contributed to lower inflation so far have been widely anticipated and have been like the low-hanging fruit of disinflation.
Supply chains were disrupted by the pandemic but have since recovered, slowing commodity price gains. The surge in oil prices associated with the Ukraine war has faded.
And something more could happen in the future. Rents have skyrocketed since 2021 as people moved alone or relocated during the pandemic. Since then, attitudes have cooled as landlords decided rental demand wasn’t strong enough to withstand rising rents, and the easing is slowly being reflected in official inflation figures.
What remains is relatively rapid price increases for non-housing services. This is a broad category and also includes purchases that tend to be labor-intensive, such as hospital care, school fees, and sports tickets. As wages rise, these prices tend to rise. This is due to employers trying to cover rising costs and the ability of consumers earning more to pay more without holding back.
“Massive action is behind us,” said Olivier Blanchard, a former chief economist at the International Monetary Fund and now at the Peterson Institute. “What remains is pressure on wages.”
At a press conference last week, Mr. Powell said there was “not much progress” on measures of inflation that exclude food and energy, stressing that it was possible to “bring wage inflation back to sustainable levels.” This will be an important part of limiting the rest of the price increase.
There are early signs that the labor market is slowing down. The labor cost index of wages, which the Fed closely monitors, is climbing It is growing much faster than before the pandemic, but has slowed since its peak in mid-2022.measure of average hourly wage dropped even more markedly. And unemployment claims have increased in recent weeks.
However, employment remains strong and the unemployment rate is low. So economists are trying to see if the economy has cooled enough to warrant a full return to normal inflation.
Silas Scarborough, 42, has witnessed both the rapid wage growth and rapid inflation characteristic of today’s economy. Scarborough works as an analyst for a homebuilding firm in Sacramento, and he said his skills are in such high demand that he can land a new job as soon as he wants. He got a 33% raise when he joined two years before him, and his salary has risen even more since then.
Still, with rising inflation and his and his family spending more than they did pre-pandemic, he has credit card debt. They’ve been to Disneyland twice in the last six months and are also eating out more regularly.
“It means you only live once,” he explained.
He said he bought a house just when the pandemic started and now has about $100,000 in assets, so he feels comfortable spending over his budget. In fact, he’s less worried about inflation these days. It was more noticeable to him when gas prices were rising rapidly.
“That’s when I realized inflation was putting pressure on the budget,” Mr. Scarborough said. “I feel more comfortable now. I don’t think about it every day.”
Fed officials are not yet reassured and may take further steps to contain inflation. Officials last week expected to raise interest rates to 5.6% this year, with two more quarters of hikes to reach the highest level since 2000.
Investors doubt it will happen.Given the recent slowdown in inflation and signs that the job market is beginning to crack, they expect another rate hike Full rate cuts in July and by early next year. But if that bet is wrong, the next phase of the fight against inflation could be more painful.
Rising borrowing costs are pushing consumers and businesses to leave, and are expected to lead to fewer jobs and fewer job opportunities for people like Scarborough. The economic slowdown may leave some people out of work entirely.
Fed policymakers expect the unemployment rate to jump to 4.5% by the end of next year, up slightly from the current 3.7%, but far below historically low levels. But Blanchard thinks the unemployment rate may need to rise “perhaps more” by 1 percentage point.
Harvard economist Jason Furman said the unemployment rate could rise further. He said it was “possible” in a bad scenario that unemployment could take as much as 10% before inflation fully returns to normal, although it wasn’t his forecast. This surge in unemployment at the worst of the 2009 recession lowered inflation by about 2 percentage points, he said.
In any case, Furman cautioned against jumping to conclusions too early on the future course of inflation based on progress so far.
“People were very premature to continue declaring victory over inflation,” he said.