A family buys Halloween candy at a Walmart Supercenter on October 16, 2024 in Austin, Texas.
Brandon Bell | Getty Images
just because Fed approaching its inflation The goals do not mean the problem is solved, as high prices for goods and services in the U.S. economy continue to burden individuals, businesses and policymakers.
The latest goods and services price report, although slightly stronger than expected, suggested that inflation over the past year has moved closer to the central bank’s 2% target.
Actually, Goldman Sachs recently estimated When the Bureau of Economic Analysis releases data on the Fed’s favorite price indicator later this month, the inflation rate may be close enough to be rounded down to the 2% level.
But inflation is a mosaic. It can’t be fully measured by any personal standard, and by many measures it remains well above what most Americans, and indeed some Fed officials, are comfortable with.
San Francisco Fed President Mary Daly sounded like many of her colleagues when she touted easing inflationary pressures last Tuesday, but noted that the Fed was not declaring victory and was in no rush to rest on its laurels.
“We have no guarantee that we will continue to make progress toward our goals, so we must remain vigilant and aware,” she told a group gathered at NYU’s Stern School of Business.
Inflation is not dead yet
Daley began her talk with an anecdote she encountered on a recent walk near her home. A young man pushing a stroller and walking his dog yelled, “President Daley, are you declaring victory?” She assured him that she would not be waving any flags on inflation.
But the conversation encapsulated a dilemma facing the Fed: If inflation persists, why do interest rates remain so high? Conversely, if inflation remains unchecked—those from the 1970s may remember the “Clamp Inflation Now” button—why would the Fed cut rates at all?
In Daley’s eyes, Fed cuts rates by half a percentage point September’s policy was an attempt to “right-size” the current interest rate environment in line with inflation moving away from its mid-2022 peak, amid signs that the labor market is softening.
Convincing people that inflation is easing is difficult, as the problems with young people demonstrate.
When it comes to inflation, there are two things to remember: the rate of inflation (the 12-month view that makes the headlines), and the cumulative impact that more than three years of inflation has on the economy.
Looking at 12-month rates only gives a limited view.
annual rate CPI inflation rate in September was 2.4%a huge improvement from the peak of 9.1% in June 2022. The Consumer Price Index (CPI) measure attracts most of the public’s attention but is secondary to the Federal Reserve, which prefers the Commerce Department’s Personal Consumption Expenditures Price Index. Goldman Sachs incorporated consumer price index (CPI) data into a measure of personal consumption expenditures (PCE) and concluded that the latter’s growth was only a few percentage points away from 2%.
Inflation exceeded the Fed’s 2% target for the first time in March 2021, and for months, Fed officials have viewed inflation as a “temporary” product of pandemic-specific factors that would soon subside. chairman of the fed Jerome PowellIn his annual policy speech Jackson Hole Summit, Wyoming In August, he joked to all passengers about the “good ship Transitory” and the early days of inflation.
Clearly, the inflation was not temporary, with the CPI reading for all items rising by 18.8% since then. Food inflation has soared 22%. Eggs rose 87%, car insurance It surged nearly 47%, while gasoline, although currently on a downward trend, is still up 16% from that time. And, of course, housing: Median house price It has grown 16% since the first quarter of 2021 and is up 30% from the beginning of the pandemic-induced buying frenzy.
Finally, while some broad inflation measures, such as the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE), are retreating, others are showing stubbornness.
For example, the Atlanta Fed measures “Sticky prices” Although the Flexible Consumer Price Index, which includes food, energy and vehicle costs, was at an outright deflationary -2.1%, inflation for things like rent, insurance and health care remained at 4% in September. Run at speed. This means that prices that change less are still high while prices that change more (gasoline in this particular case) are falling, but the opposite may be true.
The sticky price indicator also raises another important point: “Core” inflation, which excludes food and energy prices (which fluctuate more than other items), as measured by the Consumer Price Index (CPI), remained at 3.3% in September, and by consumption As measured by the Consumer Price Index (CPI), it was 2.7% in August. PCE index.
While Fed officials have been talking more about headline data recently, historically they have viewed core data as a better indicator of long-term trends. This makes the inflation data more troublesome.
Borrow money to pay higher prices
Before inflation surged in 2021, U.S. consumers were accustomed to negligible inflation. Even so, in the current economy, despite constant complaints about the skyrocketing cost of living, people continue to spend, spend, and spend more money.
second quarter, Consumer spending approaches $20 trillion On an annual basis, according to the Bureau of Economic Analysis. September, Retail sales growth exceeded expectations by 0.4%of which the group directly included in the calculation of GDP increased by 0.7%. However, spending grew only 1.7% year-on-year, below the CPI inflation rate of 2.4%.
Increasingly, spending is being financed through various forms of IOUs.
According to the data, total household debt was $20.2 trillion in the second quarter of this year, an increase of $3.25 trillion, or 19%, from the first quarter of 2021, when inflation began to surge. Fed data. In the second quarter of this year, household debt increased by 3.2%, the largest increase since the third quarter of 2022.
So far, rising debt has not proven to be a big problem, but it is becoming one.
current debt delinquency rate It was 2.74%, the highest level in the past 12 years, but still slightly below the long-term average of around 3% in Fed data since 1987. New York Fed Survey It showed that respondents believed the likelihood of failing to make minimum debt payments in the next three months jumped to 14.2%, the highest level since April 2020.
It’s not just consumers who have access to credit.
Small business credit card usage continues to rise, up more than 20% from pre-pandemic levels and near its highest level in a decade, according to Bank of America. Economists at the bank expect pressure may ease as the Fed lowers interest rates, but the depth of the cuts could be called into question if inflation proves sticky.
In fact, one bright spot for small businesses relative to credit balances is that they didn’t actually keep up with the 23% inflation increase in 2019, according to Bank of America.
But overall, the mood among smaller companies was more pessimistic. A September survey by the National Federation of Independent Business showed that 23% of respondents still cited inflation as their main problem, making it the top issue facing members.
Fed’s Choice
Amid the maelstrom of good news/bad news inflation, the Federal Reserve will make an important decision at its policy meeting on November 6-7.
As policymakers voted in September to cut the benchmark interest rate by half a percentage point, or 50 basis points, The market behaves strangely. Rather than pricing in lower rates, they are starting to indicate a higher trajectory.
interest rate 30-year fixed mortgageFor example, rates have risen about 40 basis points since the cut, according to Freddie Mac. this 10-Year Treasury Bond Yield also increased by a similar amount, and 5-year break-even rateThe bond market inflation gauge, a measure of Treasury inflation-protected securities with five-year government bills over the same period, has risen about a quarter of a percentage point and recently reached its highest level since early July.
SMBC Nikko Securities has been the lone voice on Wall Street encouraging the Fed to temporarily hold off on cutting interest rates until it gets a clearer picture of the current situation. The company’s position is stock market price Weaker financial conditions could push inflation to a new record as the Fed shifts to easing mode. (Atlanta Fed President Raphael Bostic recently said he was considering the possibility of suspending the Fed in November.)
“For Fed policymakers, lower interest rates are likely to further ease financial conditions, boosting wealth effects through higher stock prices. At the same time, the worrying inflation backdrop should persist,” SMBC Chief Economics said Joseph LaVorgna, a former senior economist at Donald Trump’s bank. the Trump White House wrote in a report Friday.
That leaves people like the young people met by San Francisco Fed President Daley nervous about the future and suggests the Fed may be making policy mistakes.
“I think we can move toward a world where people have time to catch up and then make progress,” Daley said in a speech in New York. “That said, I told my young father on the sidewalk what I thought of victory, and that’s when I thought the job was done.”
