President Biden has publicly praised the latest inflation report, and Federal Reserve officials also breathed a sigh of relief as rapid price increases show signs of slowing.
But the pressing question now is whether the pace of progress toward the long-awaited and much-welcomed gradual price increase 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 ease later this year and into 2024 as disruptions from the pandemic fade and consumers become less willing to accept ever-higher prices for goods and services. U.S. shoppers are feeling the squeeze from both lower savings and higher Fed interest rates.
However, as prices continue to rise slowly, economic officials are becoming increasingly cautious. Significant uncertainties loom, some of which could lead to an early decline in inflation, while others could keep inflation rising.
Base case: Inflation is expected to fall
Price increases this summer have been slowed by various measures. The overall consumer price index (reflected in the PCE numbers, which are the focus of both analysts and the media as they are released at the beginning of each month) slowed to 3.2% from a peak of 9.1% in June 2022. did.
And since consumers haven’t experienced such rapid price increases, their expectations are Prepare for future inflation I came down. This is 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:please keep it upUntil the fact that inflation is under control becomes a positive thing.
“Inflation is moving in the right direction,” said Gennady Goldberg, interest rate strategist at TD Securities. But it’s like a fire, he said, and “you want to put out the last embers because if you don’t, it can flare up quickly.”
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 change is now starting to be reflected in official inflation data as people renew their leases and move out.
Help in slowing inflation is also coming from an unlikely source: China. The world’s second largest economy is growing much slower than expected after reopening from pandemic lockdowns. That means there are fewer people competing for the same products around the world, weighing on prices. And if Chinese authorities respond to the recession by boosting exports, goods could become cheaper on world markets.
And more generally, Fed policy should help contain inflation in the coming months. The central bank has raised interest rates to a range of 5.25% to 5.5% over the past year and a half. 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: gas, travel costs, health care.
But some key commodities could pose problems for the inflation outlook. There is only one gas.
AAA data show Gasoline prices are more than $3.80 a gallon, up from about $3.70 a month ago, due to refinery closures and global production cuts.
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, gas prices can affect other prices, such as airfares.
And it’s not just gas and transportation costs that could halt the rapid decline in inflation. 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 are also contributing to curbing inflation, but it is becoming increasingly unclear how much they will contribute to curbing inflation in the future.
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. Moreover, some new-car makers are rebuilding inventories after years of shortages, which could ease pressure across the auto market. (especially electric vehicles It’s piled up on the dealer’s lot.. )
But surprisingly, used car wholesale price The latest data shows 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. Added to that is the possibility of a United Auto Workers union strike. Labor union contract expires He said there are risks ahead for car inventories and prices in mid-September.
In fact, sustained demand in the used car market is a symptom of a broader trend. Despite much higher interest rates, the economy appears to be holding up.housing prices climbed The economy has continued to grow since the start of the year despite soaring mortgage rates, and data released on Thursday is expected to show consumer spending remains strong.
A more general risk, the potential for economic acceleration, is perhaps the biggest wildcard facing policymakers. If Americans remain willing to open their wallets despite higher price tags and higher borrowing costs, it could be difficult to completely rein in inflation.
“We’re keeping an eye on signs that the economy may not be as cool as expected,” Powell said last week.