WASHINGTON (TN) – US inflation is showing signs of entering a more stubborn phase That would require drastic action by the Federal Reserve, a change that has terrified financial markets and increased the risk of a recession.
Some of the long-time drivers of high inflation – rising gas prices, supply chain disruptions, rising used car prices – are fading. Yet the underlying measures of inflation are actually deteriorating.
The ongoing development of the forces behind inflation, which is nearing a four-decade high, has made it difficult for the Fed to keep it under control. Prices are no longer rising as some categories have skyrocketed in cost. Instead, inflation has now spread more widely through the economy, driven by a stronger job market. This is pushing up paychecks, forcing companies to raise prices to cover higher labor costs and giving more consumers to spend.
On Tuesday, the government said that inflation rose by 0.1% 8.3 per cent from July to August and a year earlier, down from a four-decade high of 9.1% in June.
But excluding the volatile categories of food and energy, so-called core prices rose an unexpectedly sharp 0.6% from July to August, after a modest 0.3% increase in the previous month. The Fed closely monitors key prices, and the latest data has raised fears of an even more aggressive Fed and caused stocks to drop, The Dow Jones broke more than 1,200 points.
Key price data further reinforced concerns that inflation has now spread to all corners of the economy.
“One of the most remarkable things is how widespread the price advantage is,” said Matthew Luzzetti, chief US economist at Deutsche Bank. “The underlying trend in inflation has certainly shown no progress toward moderating so far. And this should be a concern for the Fed as price gains have become increasingly demand-driven, and therefore more persistent. is likely to. “
Demand-driven inflation is a way of saying that consumers, who account for about 70% of economic growth, keep spending, even if they resent paying more. Partly, this is due to broader income gains and partly because many Americans still have more savings than they did before the pandemic, after postponing spending on vacations, entertainment and restaurants.
When inflation is primarily driven by demand, it may require more drastic action from the Fed than when it is primarily driven by supply shocks, such as disruptions in oil supply, which often resolve on their own. could.
Economists fear the only way for the Fed to slow strong consumer demand is to raise interest rates so high that unemployment rises sharply. And potentially cause a slowdown. Typically, as the fear of layoffs rises, not only do the unemployed reduce expenses. So, too, are many people who fear losing their jobs.
Some economists now think the Fed will need to raise its benchmark short-term rate early next year to 4.5% or more, up from previous estimates of 4%. (The Fed’s prime rate is now in the range of 2.25% to 2.5%.) A higher rate from the Fed will, in turn, lead to higher costs for mortgages, auto loans and business loans.
The Fed is widely expected to raise its benchmark short-term rate by three-quarters of a point next week For the third time in a row. Tuesday’s inflation report also prompted some analysts to speculate that the central bank may announce a full percentage point increase. If it does, it would be the biggest increase since the Fed began using short-term rates to guide consumer and business borrowing in the early 1990s.
While headline inflation barely rose last month, underlying inflation, which reflects macroeconomic trends, worsened. A measure that the Federal Reserve Bank of Cleveland uses to track average inflation, which essentially ignores categories with the biggest price swings, rose 0.7% in August. It was the largest monthly increase since records began in 1983.
Higher prices have yet to create much of what economists call “demand destruction” — a pullback in spending that could suppress inflation. Although higher gas prices have caused Americans to drive less, there is no evidence of significant reductions elsewhere.
For example, restaurant prices rose 0.9% in August and 8% in the past year. But it hasn’t discouraged people from going out at all. Restaurant traffic has exceeded pre-pandemic levels on Open Table, an app that tracks reservations, and was still on the rise in September.
Overall, consumers have largely maintained their spending, even with rampant inflation, though perhaps due to tooth loss. In July, spending rose 0.2% after adjusting for higher prices.
The spread of inflation in services, such as rental costs and health care, largely reflecting the impact of higher wages. Hospitals and doctors’ offices have to pay more for nurses and other staff. And as more Americans get jobs or grow, they are able to move out of family homes or be separated from roommates. Rental costs have risen 6.7% in the past year, the highest since 1986.
According to the Federal Reserve Bank of Atlanta’s wage tracker, wages and salaries rose 6.7% in August from a year earlier, the biggest increase in nearly 40 years. And Luzzetti notes that the same data shows record salary premiums for people who change jobs, compared to those who remain on the job. That means employers are still making big offers to try to fill jobs.
Economists expected rising prices of services to be offset by falling prices of goods such as new and used cars, furniture and clothing after those increased in the pandemic. As supply chain backup improved, better inflows of such goods were expected to bring down prices.
Yet so far this has not happened.
“We’ve seen shipping costs come down, we’ve seen supply chain congestion a little bit less, production has improved and inventory has increased,” said Laura Rosner-Warburton, senior economist at Macropolicy Perspectives. “So it all suggests some supply-side improvement. And yet companies are still raising big price hikes for those goods, and that’s problematic.”
Such trends could renew the debate about how lack of competition has increased the ability of corporations to raise prices, a phenomenon known as “greed”. But most economists attribute the ability of companies to still charge higher fees to consumers’ willingness to pay.
“It appears that retailers are now raising prices because they can, not because they have to. Consumer demand is still very strong,” said Anita Markowska, chief economist at Jefferies, an investment bank, in a research note. he said.