A food shopper looks for vegetables at Hannaford’s Supermarket in South Burlington, Vermont, on July 1, 2023.
Robert Nickelsberg | Getty Images
Don’t lift your party hat just yet: Despite recent signs that inflation is cooling, the fight to bring down the meteoric rise in prices of the past three years is far from over.
Financial markets were buoyed by a pair of reports last week showing that growth rates in the prices consumers pay at checkouts and the prices businesses pay for goods they use have hit multi-year lows.
But those data points reflect relative rates of change, not the overall surge that led to the highest level of inflation in more than 40 years. What’s more, there are still troubling undercurrents in the economy, such as rising fuel prices and a clogged housing market, that could cause problems down the road.
“There’s no victory. There’s no mission done. Our job isn’t done,” Jared Bernstein, chairman of the White House Council of Economic Advisers, said Monday morning on CNBC’s “Squawk Box.” “But we’re happy to see American families have some breathing room.”
this consumer price indexThe widely watched measure, which tracks dozens of goods and services across multiple industries, rose just 0.2 percent in June, bringing the annual gain to 3.1 percent. The latter figure was down sharply from a peak of 9.1% a year ago, the highest in nearly 41 years and the lowest since March 2021.
Also last week, the Labor Department reported that producer price index It rose just 0.1% in June, the same as a year earlier. The 12-month PPI reading peaked at an annual rate of 11.6% in March 2022, the highest reading since November 2010.
The sharp declines in both data raised hopes that the Fed could ease off rate hikes and the tightening of monetary policy it has implemented since early 2022 as inflation moves closer to its 2% target.
Temporary calm?
“Cooling inflation. Slower but still positive job growth. These are all components of a soft landing,” Andrew Hollenhorst, an economist at Citigroup, said in a note. “Price inflation in the near term May not contradict growing hope among Fed officials and markets that a benign outcome is being achieved.”
However, Citi’s economics team is concerned that ideal conditions, which include resilient consumer spending, stronger supply chains and lower prices in key areas such as energy and autos, may not last.
“Tight labor markets, rising wages and upside risks to inflation in housing and other services mean we are not optimistic,” Hollenhorst added. “Inflation could accelerate again in early 2024 if financial conditions do not tighten.”
warning signs abound
There are certainly reasons for caution, if not outright skepticism, about the direction of inflation.
The easiest thing to point out is that the CPI may have fallen sharply if you include all items, but the trend is less impressive when you exclude the more volatile food and energy prices. Energy is down nearly 17% over the past year and could turn things around quickly.
So-called core inflation rose 0.2% in June to an annual rate of 4.8%, well above the Fed’s expectations.
Housing is another focus.
At the heart of the Fed’s forecast that inflation will slow is the belief that rental costs will start to fall after home prices soared early in the pandemic. However, housing costs rose another 0.4% in June and are now 7.8% higher than a year ago. The figure has just come off a peak earlier this year, but remains close to the highest level since the early 1980s.
In a longer-term perspective, despite the recent easing, the CPI is still up about 18% from three years ago.
There are other vexing issues as well.
Health insurance costs have dropped nearly 25 percent over the past year, largely due to blurring adjustments for the category by the Bureau of Labor Statistics. The adjustment is due to end in a few months, meaning the category, while making a small contribution to the CPI weight, could become a more important factor.
Inflation caused a lot of pain
Fed officials have pledged not to be complacent about inflation and have repeatedly expressed concern about the impact on low-income families and workers.
Small businesses have also been hit hard by rising prices and the Federal Reserve raising interest rates to restore price stability.
“Inflation does change cost structures, and in some cases, potentially permanently for many small businesses,” said David Cody, co-founder and co-CEO of Newity. Focus now Provides loan solutions to small businesses.
“As the economy slows, not only is there headwinds to growth (what’s happening now), but absolute interest rate and pricing pressures on inputs are high,” he added.
Coty said the current environment is extremely challenging for small business financing and he does not expect any benefit from lower inflation for now.
“Given all the headwinds that have come out over the past few years, including COVID-19, things have to change a lot for those small businesses to change the landscape in a material way,” he said.
To be sure, there is also plenty of evidence that inflation is heading in the right direction.
An easing of supply chain issues is likely the biggest positive. A New York Fed Indicators Global supply chain stress is near the lowest level since 2008.
In addition, demand could weaken as consumers drain excess savings accumulated through trillions of fiscal and monetary stimulus, putting downward pressure on some key categories. These trends could prompt the Fed to ease off the brakes.
“An underlying improvement in core goods and services inflation won’t stop the Fed from raising rates later this month, but assuming the trend persists, it should convince the Fed to stay on hold thereafter and eventually in the first half of next year,” Capital Economics ( Capital Economics North America chief economist Paul Ashworth wrote.
The Commerce Department will take a better look at the impact of inflation on spending on Tuesday.
retail sales It is expected to have grown 0.5% in June, an important figure because it is not adjusted for inflation. If spending does outpace price increases this month, that in itself could be inflationary.
Kavan Choksi, managing director, said: “The US economy has proven resilient through continued consumer spending, with the Fed temporarily pausing rate hikes, but continuing this trend at current rates could create Higher New Normal Spending Levels.” In KC Consulting.
“The reality is that current inflation rates are still having a negative impact on consumers,” he added. “So while we’re on the right track, we still have a long way to go.”