Inflation will cool.

Apr 13, 2023
Inflation will cool.

Inflation has fallen from historic levels, although not yet enough to stop the squeeze on the economy.

Here’s the takeaway from yesterday’s release. First, the good news: prices have risen at a slower pace. About two yearsGrowing 5 percent in the 12 months ended March. The increase is still higher than the 2 percent annual rate policymakers want to keep the economy in recession — but down from last summer’s peak of 9 percent.

The bad news is that other measures — particularly indicators that include food and energy prices, known as core inflation — tell a more mixed story. In the table below, you can see that core inflation is more stable than headline inflation and therefore more susceptible to misinterpretation.

“We’re past hyperinflation,” says Jeanne Smialek, my colleague who covers the Federal Reserve. But inflation is still very stubborn.

Mixed news suggests the Fed’s recent moves have worked to tame inflation, but suggests more action is needed to bring inflation down to sustainable levels. Today’s newsletter breaks down the information and what the Fed might do next.

There is a story behind the number that started a few years ago. With money from the Covid relief law and stuck at home during the pandemic, Americans bought extra things they could use in their homes. Therefore, the prices of commodities – physical things like furniture and household items – will increase significantly in 2021.

As the economy recovers from the shock of Covid and people start going out again, consumer demand is shifting to services – things you pay people to cook for you at a restaurant, for example, or fly you across the country. As you can see in this chart, prices are rising, especially for airlines, transportation, and restaurants.

It’s a trend that policymakers are now seeing. It suggests that consumer demand is still very high – first chasing limited goods and now chasing limited services, causing prices to rise.

There are some good signs that inflation will ease further. The flood of money people received from the government during the pandemic is drying up, reducing consumer demand. The supply chain has distanced itself from the shenanigans of the pre-Covid days. The shock in oil and gas prices caused by Russia’s invasion of Ukraine has subsided. In an effort to further control demand, the Federal Reserve has raised interest rates to make borrowing more expensive.

But there are some possible bad signs. U.S. consumers are still spending more, taking advantage of higher wages and savings during the pandemic. OPEC is cutting production to raise prices. The longer inflation persists, the more likely it is to become entrenched in the economy – making it harder to bring it down. “It’s not that inflation is going to come back and grow again, but we’re not going to be able to completely eliminate the rest,” Jenna said.

Going forward, policymakers will probably try to take a balanced approach to reconciling the mixed story. The Federal Reserve may take more measured measures than last year. The central bank typically raises rates by a half-point or more through 2022, but last month it accepted a small quarter-point hike and is expected to repeat that move at its next meeting in May.

In the year As is the case in 2021, there is a risk that the Fed will do too little and inflation will continue. This newspaper has been discussed before. A strong economy leads to rapid price increases. But a weak economy puts many people out of work. Policymakers are trying to find a sweet spot between these two extremes.

The latest inflation data suggests the country is getting there – the end of rapidly rising inflation is probably in sight. But the information is not enough to rule out mirage.

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