WASHINGTON —
Last year, inflation in the United States fell from 9% to 3%, easing most of the price pressures that have plagued the country for more than two years.
Now comes the hard part.
Rooting out the end of excessive inflation and bringing it to the Federal Reserve’s desired 2% target is expected to be a slower and more difficult task.
A measure called “core” inflation, which excludes fluctuating food and energy prices, is higher than headline inflation. And it is also likely that it will slow down a bit. The Fed pays particular attention to underlying prices, viewing them as an indicator of where inflation is headed. In June, underlying prices were 4.1% above where they were a year ago, according to the central bank’s preferred measure.
“We see some challenges in getting absolute returns to 2% quickly,” said Michael Hanson, senior global economist at JP Morgan.
Persistent inflation could hurt the Fed’s chances of achieving a rare “soft landing,” a scenario in which it manages to reduce inflation to the level it wants through higher interest rates. the economy cannot be derailed. If inflation remains high for a long time, the central bank may be forced to raise its benchmark rate from the current level of 5.4%, the highest in 22 years. Most economists say they believe the Fed will not raise rates, but only if inflation continues to decline.
At the same time, the central bank acknowledged that inflationary pressures have eased significantly over the past year. In an encouraging sign, that decline occurred even as the economy continued to expand and employers continued to hire at a healthy pace.
On Thursday, when the government releases inflation data for July, economists expect it to show a slight increase in year-over-year inflation, to 3.3%. This is the first increase of that type after 12 months of decline.
In part, any increase in annual inflation in July will reflect higher fuel prices. Unless they decrease, the price of petroleum may remain at the headline inflation of more than 3% until the end of the year. The national average pump price rose about 30 cents, to $3.83, last month, in part because oil prices rose.
One obstacle to bringing inflation down to the 2% the Fed wants is that the decline in prices so far has mostly reflected painless changes that are unlikely to repeat. Last month, for example, gasoline prices fell from a national average of $5 at their peak. And the bottlenecks in supply chains that drove up the prices of cars, furniture, appliances and other physical goods have ended. In fact, the cost of durable goods fell slightly in June compared to a year ago.
Another factor is that prices increased in the first half of 2022 before decreasing in the second. So any increase in July will have the effect of increasing the year-on-year inflation rate.
The current driver of price increases is primarily the cost of services, which range from dental care and car insurance to restaurant meals and summer concerts. For the most part, these costs reflect healthy wage increases for workers, which are often passed on to consumers in the form of higher prices.
“Energy prices are lower, commodity prices are down, commodity (prices) are down,” said Kristin Forbes, an economist at MIT and a former member of the bank’s interest-setting committee from England. “That’s quick and easy. What remains is the underlying inflation of the wage-service relationship. And that’s the part that’s the hardest to get down and takes the most time. ”
Many employees, especially in the service sector of the economy, may demand larger pay increases in the coming months. At a time when labor shortages continue to be a problem for service companies, workers have the advantage of being able to demand higher wages. For most Americans, wage increases have been below inflation for the past two years.
The demand for higher salaries is a key point that drives the strikes of actors and writers in Hollywood. It was also one of the demands of the Teamsters union in their negotiations with the courier company UPS, which resulted in a sharp increase in wages. The United Auto Workers union has also pushed for strong wage increases for workers in its talks with American automakers.
JP Morgan’s Hanson says health insurance cost measures will begin to rise later this year due to changes in the way the government measures it. And auto insurance and repair shop costs are skyrocketing. A major reason for this is that vehicle prices have increased following shortages of auto parts that emerged when the COVID-19 pandemic hit; More expensive cars cost more to repair and insure. Auto insurance rates have risen nearly 17% in the past year.
As a result, economists generally expect underlying prices—according to the Fed’s preferred measurement method—to continue to rise at an annual rate of 3.5% by the end of the year, well above the target of 2%. . The central bank’s latest forecasts show that its officials expect core inflation to still be at 2.6% by the end of 2024.
However, there are still some optimistic signs that hiring and wage growth are slowing, which will eventually cool inflation. On Friday, the government reported that employers added 187,000 jobs in July, a solid total but still showing a slowdown: Employment growth over the past three months averaged only half over the same period in 2022. And wage growth fell to 4.6% in the April-June quarter, the government said, the slowest pace in a year and a half.
“That trajectory tells us where things are going to be over the next 12 months,” said Skanda Amarnath, executive director of Employ America, an advocacy group.
In his latest press conference, Fed Chairman Jerome Powell spoke cautiously but optimistically about the prospect of a soft landing.
“I still wouldn’t use the term ‘optimistic’ about it,” he said. “However, I would say that there is a way … Right now we are seeing the beginning of disinflation without any real cost to the labor market. And that is a very good thing.”
However, a defining feature of the post-pandemic US economy is its resilience, with consumers showing a surprisingly persistent willingness to spend. Some economists worry that a sharp rise in unemployment will be needed to reverse that trend and finally beat inflation.
The governor has already faced some criticism for raising rates so sharply and possibly putting the labor market at risk. Democratic Senator Elizabeth Warren wrote to Powell before the central bank held a meeting last month and urged him to refrain from making another rate hike. But the Fed is still on track for its 11th rate hike since March 2022.
“The Fed’s aggressive rate hikes disproportionately threaten Black workers and their families, and risk completely reversing the remarkable gains we’ve seen in the labor market,” wrote Warren, a frequent who is critical of the Federal Reserve.
At a time when political pressure is increasing on the central bank, Powell and other officials will soon see that the sharp reduction in inflation in the first half of the year is the easy part.
“The Fed was lucky with what it got,” said Steven Blitz, chief U.S. economist at GlobalData TS Lombard, a data analytics firm. “Most of the reduction in inflation is going to happen anyway. They’re really responsible for the part that’s coming.”
