THE NEW YORK TIMES – As inflation began to pick up in 2021, price pressures were clearly tied to the pandemic: Companies couldn’t produce cars, sofas and computer games fast enough to keep up with demand from homebound consumers due to disruptions in supply chains.
In this year, the war between Russia and Ukraine caused fuel and food prices to soar, intensifying price pressures.
But now, as these sources of inflation show the first signs of weakening, the question is how much overall price increases will slow. And the answer is likely to be driven, in part, by what is happening in a crucial area: the labor market.
The employees of Federal Reserve (the Fed, the US central bank) they are 100% focused on job and wage growth as they rapidly raise interest rates to control unwanted effects on the economy and slow rapid price increases. They are convinced they must weaken some of the economy’s momentum to face the worst inflation in four decades and bring it back to the 2% target.
The way they intend to do this is by cutting expenses, hiring and salaries – and to achieve that goal, they are increasing borrowing costs. So far, a considerable slowdown is proving elusive, suggesting to economists and investors that the Fed may need to be even more aggressive in its efforts to dampen growth and reduce inflation.
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As this week’s data showed, prices continue to rise. And while the job market has become a little less heated, employers are still hiring steadily and raising wages at the fastest pace in decades. This steady advance appears to allow consumers to continue spending and may give employers both power and motivation to raise prices to cover rising labor costs.
According to economists, as inflationary forces remain stable, the risk increases that the Fed will clamp down on the economy too much and the United States will enter a period of recession – likely one in which growth slumps and unemployment soars.
It is becoming increasingly likely that “it will not be possible to stop inflation in this economy without a recession and a higher unemployment rate,” he said. Krishna Guha, who leads the central bank’s global policy and strategy team at Evercore ISI and that he had been predicting that the Fed could contain inflation without triggering a full-blown recession.
The challenge for the Fed is that, increasingly, the rise in prices appears to be driven by enduring factors implicitly linked to the economy, and less by one-off factors caused by the pandemic or the war in Ukraine.
Inflation currently has a very large implicit component that is based on a very buoyant labor market
Jason Furman, economist at Harvard University
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The US Consumer Price Index data for August, released on Tuesday, illustrates this point. Gasoline prices have dropped sharply in the past month, which has led many economists to believe that this would pull general inflation down. They also thought that recent improvements in supply chains would mitigate commodity price increases. Used car prices, which contributed significantly to inflation last year, are also now decreasing.
However, despite these positive developments, the rapid increase in spending on a wide range of products and services helped push up prices during the month. Rent, furniture, restaurant meals and trips to the dentist are getting more and more expensive. THE Inflation rose 8.3% year-to-date and increased 0.1% from the previous month.
The big question for the Fed is not, ‘Is inflation already peaked?
Aneta Markowska, chief economist at Jefferies
“Inflation currently has a very large implicit component that is based on a very buoyant labor market,” he said. Jason Furman, economist at Harvard University. “And then, in any other month, inflation might be higher because of a run of bad luck, like gasoline going up, or lower because of a stroke of luck, like gasoline going down.”
“The big question for the Fed is not, ‘Has inflation peaked?’ But really, ‘Where will she take us?’ Aneta Markowska, chief economist at Jefferies. She estimates it will be difficult to achieve inflation below 4% – double the Fed’s 2% target – without a substantial slowdown in the economy and the job market.
“We still have housing and the job market, there is a lot of inflationary pressure still coming from these two areas, which are very unbalanced,” said Aneta.
That’s why the Fed, which meets this week, is striving to bring supply and demand back into balance. l TRANSLATION OF ROMINA CACIA
