WASHINGTON– It’s perhaps the biggest question currently swirling around the U.S. economy: Is inflation stuck at a high level — or will last year’s steady decline resume soon?
On Wednesday, the government will release the latest monthly inflation report, a set of numbers that will be scrutinized by economists, Wall Street traders and Federal Reserve officials for insight on the issue. Analysts estimate year-on-year inflation rose to 3.4% in April from 3.5% in March, according to a survey by data provider FactSet. Measured from March to April, consumer prices are expected to have increased by 0.4%, the same as the previous month.
Core inflation, which excludes volatile food and energy costs, could indicate some relief is in sight: it is expected to slow to 3.6%, which would be the lowest level in three years, compared to 3.8% in March. Month over month, core prices would have increased by 0.3%, down from the previous 0.4%. The Fed closely tracks core prices, which tends to provide a better sense of where inflation is heading.
The continued decline in inflation will likely have a significant effect on this year’s presidential race. Republican critics of President Joe Biden have sought to shift blame for high prices to the president and use it to try to derail his re-election bid. Although hiring remains robust and wage growth, on average, healthy, prices generally remain well above their pre-pandemic levels.
On Tuesday, Fed Chairman Jerome Powell reiterated that he expects inflation to eventually reach the central bank’s 2% target. But in remarks at a panel discussion in Amsterdam, Powell acknowledged that his confidence in that forecast had weakened after three straight months of high prices. Inflation has fallen sharply from 9.1% in summer 2022, but is now higher than in June 2023, when it first reached 3%.
Fed policymakers raised their key interest rate to 5.3%, its highest level in 23 years, in a bid to stem rising prices. Powell emphasized Tuesday that the Fed would keep the rate at that level for as long as necessary to fully defeat inflation, a sign that rate cuts would not begin as soon as many had hoped.
Such comments from Powell dashed Wall Street’s hopes that the Fed would cut rates three times this year, something central bank officials had planned to do last March. Many economists now envisage only one or two cuts this year, starting in September at the earliest.
Economists are divided on whether the high inflation figures of recent months reflect a reacceleration of price growth or are just echoes of pandemic-related price distortions. Even though auto insurance is up 22% from a year ago, for example, that increase may reflect factors specific to the auto industry: New car prices have jumped during the pandemic, and companies insurance companies are now seeking to offset rising repair and replacement costs by increasing repair and replacement costs. bonuses.
Apartment rents, which are stubbornly high, are another key factor in persistent inflation. Rents have soared during the pandemic as more Americans chose to live alone or sought more living space. Even though rents for new leases are increasing much more slowly, consistent with pre-pandemic trends, past increases continue to drive up government price data.
Indeed, rents and auto insurance are responsible for most of the high inflation numbers, said Alan Detmeister, an economist at UBS and former Fed member.
“Everything else is going pretty well,” Detmeister said. “Inflation continues to fall, although it is not falling as quickly as we had hoped.”
Other economists point to stable consumer spending on dining out, travel and entertainment, categories in which, in some cases, price increases have also been high, likely reflecting strong demand.
Powell, in his remarks Tuesday, also highlighted rising rents as a key factor in keeping inflation high. He called it “a bit of a headache” because measurements of new apartment leases show new rents are barely increasing. This weaker data has apparently not yet been taken into account in the government measures, which cover all rents, including for tenants who renew their lease and face larger increases. Powell said the government’s measures should ultimately result in a slowdown in rental growth.
The Fed chairman also acknowledged that the economy “is different this time” because many Americans refinanced their mortgages at very low rates before the Fed began raising borrowing costs in March 2022 Many large companies also set low rates around this time.
“It may be,” he said, that the Fed’s rate policy “may not hit the economy as hard as it would have if those two things weren’t the case.”
ABC News
