Inflation Is Cooling, Leaving America Asking: What Comes Next?

Martin Bate, a 31-year-old transportation planner in Fort Worth, has spent the mid-2022s feeling he’s “stomped on the ground” as gas prices soar, food costs soar and the possibility of higher rents took a toll on his finances.

Mr Bate said: “I really started to feel financially squeezed in a way that I haven’t felt before since finishing university. Since then, he has been promoted and raised his salary by 12%. Gas prices have dropped and local housing costs have been moderate enough that next month he will move into a nicer apartment with a price per square meter lower than where he lives now.

“My personal situation has improved dramatically,” said Mr Bate, explaining that he feels cautious but still hopeful about the economy. “Looks like everything will be fine.”

People across the country are finally feeling relief from the ever-increasing cost of living. After several false positives in 2021 and early 2022 — when price growth slowed and then accelerated again — signs that inflation was actually moving in the right direction had begun to build up.

Inflation has slowed down on an annualized basis for six straight months, falling to 6.5% after peaking at around 9% last summer, partly because gas has become cheaper. But the deceleration was true even after volatile foods and fuels were phased out: So-called core consumer prices have increased 0.3% or less per month over the past three months. This is faster than the 0.2% monthly change that was typical before the pandemic but much slower than the 0.9% peak in April 2021.

Finally, America may have reached an inflationary inflection point. The question now focuses on what happens next.

Some economists expect inflation to continue growing faster than it did before the pandemic, while others predict a sharp slowdown. Some predict something in between. Which outlook plays out matters a lot: The speed and extent of the cooling of inflation will dictate the extent to which Federal Reserve policymakers raise interest rates, how long they take to interest rates rise and the extent of their impact on the economy.

For now, staggering uncertainty has led Fed officials to favor continuing to slow – but not stop – their rate hikes on Jan. 31 to Feb. 31. 1 meeting. Officials pulled back the previous three-quarter point increase to half a point in December, and many favored a rate hike this time by just a quarter point. The gradual move would give policymakers more opportunity to see how the economy is developing, reducing the risk of a plunge in the economy.

“If you’re on the road and encounter foggy weather or dangerous highways, you should slow down,” Lorie Logan, president of the Federal Reserve Bank of Dallas, said in a statement last week. The same considerations that prompted central banks to slow down in December “means further deceleration at the upcoming meeting.”

Officials have just entered a period of silence ahead of the meeting, so the comments made by Ms. Logan and her colleagues over the past week are the last things investors will hear until then. Central banks fully welcome the recent slowdown in inflation – but say it is too early to claim victory and underscore the great uncertainty that lies ahead.

Many economists and Fed officials themselves estimate that price increases will take years to return to the 2% annual rate that used to be the norm. But some on Wall Street think inflation could fall sharply, possibly even returning to historic lows like pre-pandemic. The difference is stark: The top forecast in a Bloomberg survey of economists expected consumer price growth to remain at or above 5% by the end of 2023, while the lowest shows them falling to 1.5%.

The Fed will receive more data on inflation this week. The Personal Consumption Spending Index is expected to grow 5% in December from a year earlier, down from 5.5% in November. That measure is related but slower than the measure. Inflation Consumer Price Index, and it is the Fed’s official target.

As officials and economists try to figure out what will happen to inflation, the fate of everyday Americans hangs in the balance. If the Fed slows the economy down too much in an attempt to control prices and causes a deeper recession than necessary, everyone will pay with their jobs.

But if rapid price increases continue to dent wages and erode savings, that will also make households worse off.

“I’m really worried about the future,” says Karen Loeb, a 71-year-old assistant professor of sociology in Amherst, Mass. and groceries skyrocketed in the past two years.

For the likes of Loeb, as well as central bankers, there are key reasons to hope that inflation will drop significantly by 2023.

Housing costs are still rising according to official price data, but real-time rent trackers show asking prices are plummeting. Economists expect that to lead to inflation data in the coming months.

When it comes to cars, used — and more recently new cars — inventories are improving, which has started to lead to a drop in auto prices. And many other commodity prices are rising or falling slowly as transportation costs fall back to pre-pandemic levels and supply shortages ease.

Although commodity inflation accelerated due to supply problems, it was also partly due to strong demand: Consumer spending on household goods and other products has increased since 2020, a partly because families took government stimulus payments and the money they saved during the lockdown and spent it on renovations or camping equipment. But the need is decline as savings gradually eroded.

Plus, the Federal Reserve raised interest rates from near zero to over 4.25 percent Last year, this could hit consumer spending and make it harder for companies to raise prices without scaring off shoppers.

Omair Sharif, founder of Inflation Insights, said: “It looked like a prolonged supply shock — to some extent a demand shock — that we had to endure. “Those things seem pretty obvious on the path to normalization.”

It is encouraging that the prices of more than just some goods or services are showing a slowdown. The share of product categories with inflation above 3% fell from nearly three-quarters in early 2022 to less than half in December, said Christopher Waller, Fed governor, said in a speech last week.

But risks remain, because it’s unclear whether the forces currently pulling inflation down will be enough to quickly return prices to the 2% annual rate, the Fed’s target.

Short-term volatility is possible. Mr. Sharif said rising health care costs, tied to higher Medicare reimbursements, could even help monthly inflation accelerate again in the coming months, for example.

And increased cost can also have longer strength. Fed officials predict that inflation as measured by the Personal Consumption Spending index will remain hovering around 3.5% by the end of the year, with food and volatile fuel prices removed, and still above good 2 percent through 2024.

Stubbornness was previously predicted in relation to the booming labor market. With wages rising at an unusually fast rate as companies try to attract and retain workers, Fed policymakers think companies can continue to raise prices to cover costs. . Meanwhile, higher income will allow shoppers to continue buying the things they want and need.

That’s why many central banks are expected to raise interest rates a little more and then keep them high through 2023. Higher borrowing costs could deter consumers from spending for credit and businesses cannot expand, reducing demand in the economy and job market.

Wage growth has shown some signs of slowing down and the Fed will get a Employment cost index report one day before the rate decision February 1.

While other labor indicators have been more stable, Fed officials have predicted in their latest economic projections that the unemployment rate will rise to 4.6% by year-end, from 3. 5% now.

While that will hurt some households, Fed officials are still hopeful of a relatively gentle landing. In the face of recent inflation data, even Lawrence H. Summers, Harvard economist and former Treasury secretary, who warned that the economy could be headed for a severe recession, raised chance of avoiding a painful American recession.

“A gentle landing is the victory of hope over experience, but sometimes hope triumphs over experience,” Mr. Summers said in an interview with Bloomberg Television last week.

However, many investors believe that the US economy will slow down greatly in the coming months and will fall into a full-blown recession, forcing the Fed to cut interest rates before the end of the year.

No one really knows. Unexpected events — new developments in Ukraine, a painful debt ceiling dispute that hurts growth, or a new and unexpected surge in oil prices — can affect the outlook for growth and inflation.

“Recent years have been completely blind” to forecasters, Mr. Sharif said. “It is gradually normalizing, but it is still quite difficult.”


News7F: Update the world's latest breaking news online of the day, breaking news, politics, society today, international mainstream news .Updated news 24/7: Entertainment, the World everyday world. Hot news, images, video clips that are updated quickly and reliably

Related Articles

Back to top button