The biggest economic news post-pandemic is inflation.
The story initially had two distinct stages. First, the rise in prices accelerated rapidly due to people resuming jobs and changing jobs, and the 12-month inflation rate soared from less than 1% in June 2020 to more than 9% in June 2022.
The heat then seemed to cool down, with price growth slowing over the next 12 months to just 3.1% in June 2023.
But now it is clear that the third chapter, the stall, has occurred. For the past eight months, inflation has remained between 3% and 4% annually.
This is even after the Federal Reserve raised interest rates to their highest levels since the 1980s in an effort to bring inflation back to its official 2% target. Central bankers believe that by using high interest rates to slow the pace of borrowing and demand for funds, price increases, and thus inflation, will fall.
Higher rates seemed to be working. But experts last year began warning that the so-called last mile of a marathon toward the 2% goal is the most difficult. Now those fears appear to be justified.
“I think the market has gotten ahead of itself in terms of how quickly we’re going to get back to 2%,” said Michael Antonelli, managing director and market strategist at financial group Baird & Company.
He said the biggest hurdle is lowering what the Bureau of Labor Statistics calls shelter costs. These costs are divided into two main categories: rent and home ownership fees called owner-equivalent rent.
Both categories have now gone through months of unexpectedly slowing price growth, remaining above 6% on a 12-month basis in January.
“The elements that we thought would decline, particularly housing, which is a large part of the consumer price index, and which is a very large component of the index, we thought would decline further,” Antonelli said. Stated.
Real estate group Redfin reported Monday that rents rose 2.2% year over year to $1,981 in February. This was the largest increase since January 2023 and increased by 0.9% month-on-month.
Some of the data regarding the future strength of the economy remains contradictory. Last week’s jobs report showed that while the economy continues to add jobs at a steady pace, the unemployment rate is trending upward.
Other factors continue to play a role. Citibank analysts told clients in a note on Monday that supply chain problems, particularly those related to troubles in the Red Sea, could begin to resurface in the form of higher commodity prices.
“We do not expect inflation data in the coming months to be in sharp contrast to January’s robust data,” Citi analysts said.
Mr. Antonelli said that markets and the economy remain healthy and that consumers are now in a “no-landing” position, rather than a “soft landing” (as the Fed hopes), where inflation continues to fall without a significant increase in unemployment. He said he is looking forward to. scenario.
That’s not necessarily a bad thing. It just means that higher-than-expected inflation will most likely continue for some time.
“A ‘soft landing’ means we are close to some kind of ground, but we bounced into the ‘non-landing’ category,” Antonelli said. “We have good demographics, a vibrant economy and strong economic tailwinds. [artificial intelligence], the housing market is strong and all the same with what’s going on in the economy right now. ”
But workers are barely above water, with wages only slightly above inflation. Now, adjusted for inflation, weekly earnings total about $371, compared to $367 in the months just before the pandemic.
“It’s like someone searching your pocket and accidentally seeing a bill drop out,” said Mark Hamrick, senior economic analyst and Washington bureau chief at financial group Bankrate. “It can be reversed, but the damage to purchasing power cannot be reversed.”
For the Fed, the fact that it has raised interest rates without triggering an unemployment crisis means that interest rates are likely to remain high for some time, believing that the risk of a reacceleration in prices is greater than the threat of a spike in unemployment. It means.
Traders expect the first post-pandemic rate cut to take place in June, but they expect another rate cut to take place in June. Reuters survey It found that respondents currently think there will be fewer interest rate cuts this year than expected.
Federal Reserve Chairman Jerome Powell said in recent Congressional testimony that the first post-pandemic interest rate cut will most likely happen this year, but could not say when given continued inflationary pressures. Stated.
Other forecasters believe that global economic conditions could keep U.S. inflation at 3% indefinitely. David Andolfatto, a former Federal Reserve official and current dean of economics at the University of Miami Business School, said ongoing geopolitical turmoil and demand for defense spending are likely to keep prices up. Stated. A growing company.
The ongoing federal budget deficit, a phenomenon that both parties have shown little appetite for solving, also doesn’t help.
“These kinds of economies tend to overheat,” Andolfatto said. “There are fiscal pressures from both sides and we see inflation trending down, but I don’t think that world is over, although it has been lower than it has been for the past 10 years. Masu.”
