Inflation Eases for US Consumers, but Federal Reserve Chair Remains Cautious

Consumer inflation in the United States is showing signs of meaningful abatement. Gas prices have dropped, eggs cost about half as much as they did in January, and prices across a wide range of products are no longer climbing rapidly. Over the past 15 months, the Fed has been engaged in an aggressive battle against inflation, raising interest rates above 5 percent in an effort to bring price increases back to a more normal pace. Last week, Fed officials announced that they would not raise rates in June, allowing more time to assess the impact of the already implemented changes on the economy.

  • Despite this, Mr. Powell emphasized that it was premature to declare victory in the fight against rapid price hikes.
  • The reason behind his caution is that while cheaper gas and slower adjustments in grocery prices have contributed to a decline in overall inflation from last summer's four-decade high, food and fuel costs tend to be volatile, obscuring underlying trends.
  • Moreover, a measurement of "core" inflation, which excludes food and fuel, reveals surprising resilience as prices for various goods and services such as dental care, hairstyling, education, and car insurance continue to rise rapidly.

A Divided Front

Last week, Fed officials revised their forecast for core inflation at the end of 2023, projecting it to reach 3.9 percent, higher than the 3.6 percent predicted in March and nearly double their 2 percent inflation target.

  • In summary, the economic landscape appears to be unfolding on a divided front. While the most substantial price increases seem to be behind consumers, which brings relief to many and is celebrated by President Biden and his advisors, Fed policymakers and many external economists still harbor concerns.
  • They believe that despite indications of persistent inflation and the surprising resilience of the American economy, central bankers may need to take further action to temper growth and curb demand in order to prevent unusually high price increases from becoming entrenched.

Still, the latest Consumer Price Index inflation report, released last week, showed a significant moderation in inflation for May overall. This report feeds into the Fed's preferred gauge, the Personal Consumption Expenditures index, which is used to define its 2 percent target. The updated PCE figures are set to be published on June 30.

Wage Inflation Is More Tricky

Inflationary pressures persist in certain sectors, particularly in services outside of housing. This broad category encompasses labor-intensive purchases such as hospital care, school tuition, and sports tickets. These prices typically rise alongside increasing wages, as employers attempt to cover their higher costs and consumers, with higher incomes, have the capacity to pay without reducing their spending.

  • Early indications suggest a slowdown in the labor market. The Employment Cost Index, a closely monitored measure of wages, has experienced a more rapid increase compared to pre-pandemic levels but has slowed down from its peak in mid-2022.
  • Average hourly earnings have also demonstrated a notable decline, and there has been an uptick in jobless claims in recent weeks.
  • However, hiring has remained strong, and the unemployment rate remains low. This has led economists to contemplate whether the economy is cooling sufficiently to ensure a complete return to normalcy in terms of inflation.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.

Credits

Photo by Anna Dziubinska / Unsplash.