President Biden has openly praised the recent inflation report, and even Federal Reserve officials breathed a sigh of relief as the rapid rise in inflation showed signs of losing momentum.
But the immediate question now is whether the long-awaited and much-welcomed pace of progress toward modest price increases can be sustained.
The Fed’s recommended measure of inflation, the Personal Consumption Expenditure Index, is expected to rise to 4.2-4.3% in Thursday’s report after netting volatile food and fuel costs. This is up from June’s core index of 4.1%. While still well down from last summer’s peak of 5.4%, such numbers indicate that inflation is still stubbornly above the Fed’s 2% target and a long way to return to normalcy. It will be emphasized that the
Most economists aren’t too concerned. They still expect inflation to moderate later this year and into 2024, as the disruption from the pandemic fades and consumers are less willing to accept higher prices for goods and services. US shoppers are feeling the pressure from both reduced savings and rising Fed rates.
But inflation has been slow to rise, making economic officials more cautious. Significant uncertainties loom in the way, some of which could lead to an early decline in inflation, while others could continue to push inflation upwards.
Base Case: Inflation is expected to fall.
A variety of measures have slowed inflation this summer. Overall consumer price index (reflected in PCE figures, released at the beginning of each month and therefore a focus of both analysts and the media) slows to 3.2% from peak of 9.1% in June 2022 did.
And since consumers have not experienced such dramatic price increases, their expectations are Preparing for future inflation I came down. That’s good news for the Fed. Inflation expectations can be self-fulfilling prophecies. If consumers expect higher prices, they may more readily accept higher costs and demand higher wages, making it harder to keep inflation under control.
Still, this mildness was not enough for policymakers to declare victory. Fed officials have been trying to slow the economy and keep inflation under control since early 2022. Fed Chairman Jerome H. Powell pledged last week in a speech at a symposium in Jackson Hole:keep it goingUntil it becomes positive that inflation is being contained.
“Inflation is heading in the right direction,” said Gennadi Goldberg, rates strategist at TD Securities. But it’s like fire, “I want to extinguish the last embers, because otherwise it could flare up quickly,” he said.
Good News: Rent and China.
There is reason to believe that inflation is persistently ongoing.
Economists said a slowdown in rent growth would keep overall inflation in check for at least next year. Rents for newly rented apartments skyrocketed as people moved cities and broke up with roommates because of the pandemic. market based rent The economy started to cool last year, but this shift is now beginning to be reflected in official inflation data as people renew their rentals and move houses.
The slowdown in inflation has also come from an unlikely source: China. The world’s second largest economy is growing much slower than expected after reopening from pandemic lockdowns. That means fewer people around the world competing for the same product, weighing down prices. And if Chinese authorities respond to the recession by boosting exports, it could make goods cheaper on global markets.
And more generally, Fed policy should help keep inflation under control in the coming months. Over the past year and a half, the central bank has raised rates to between 5.25% and 5.5%. These higher borrowing costs still affect the economy as a whole, reducing demand for large purchases on credit and making it difficult for businesses to charge extra.
Bad news: gasoline, travel costs, medical care.
But some key commodities could pose problems for the inflation outlook. There is one gas.
AAA data show Refinery closures and global production cuts pushed gasoline prices to more than $3.80 a gallon, up from about $3.70 a month ago.
When Fed officials think about inflation, they mostly ignore gas because it’s driven by factors policymakers have no control over. But gasoline prices are so important to consumers that higher prices tend to raise inflation expectations, so central bankers cannot completely ignore it. Additionally, gasoline prices can affect other prices, such as airfares.
And it’s not just gas and transportation costs that could stop inflation from falling too quickly. Economists at Goldman Sachs expect medical prices to rise as hospitals try to offset recent labor cost spikes and underpin service inflation.
Uncertain News: Cars and Growth.
Used cars have also contributed to curbing inflation, but the extent to which they will contribute to curbing inflation in the future is becoming increasingly uncertain.
Many economists believe there is still room for the trend toward cheaper used cars. Dealers have significantly lowered the prices they pay for used cars at auction this year, a trend that may not yet be fully reaching consumers.Additionally, some new car makers are rebuilding inventories after years of shortages, which could ease pressure on the overall car market (especially for electric vehicles). piled up on the dealer’s lot).
But surprisingly used car wholesale price The most recent data show a slight increase.
“The used-car market is changing. The reason is quite simple: demand is much higher than dealers expect,” said Omail Sharif, founder of Inflation Insights. Add to that the possibility of a strike by the National Auto Workers Union. union contract expires Risks lie ahead in car inventories and prices in mid-September, he said.
In fact, sustained demand in the used car market is a symptom of a broader trend. The economy appears to be holding up even as interest rates rise sharply.housing prices climbed Economic growth has continued since the beginning of the year despite higher mortgage rates, and data due Thursday is expected to show consumer spending still strong.
The more general risk, the possibility of an economic acceleration, is perhaps the biggest wildcard facing policymakers. If Americans maintain their willingness to open their wallets despite soaring prices and rising borrowing costs, it could be difficult to keep inflation under control.
“We are watching for signs that the economy may not be as cold as expected,” Mr. Powell said last week.
