By Jeanna Smialek
The pressures that have kept inflation elevated for months remain strong, fresh data released earlier this week showed, a challenge for households that are trying to shoulder rising expenses and for the White House and Federal Reserve as they try to put the economy on a steadier path.
Annual inflation moderated for the first time in months in April, but the consumer price index still increased 8.3%, an uncomfortably rapid pace. At the same time, a closely watched measure that subtracts food and fuel costs accelerated.
Core inflation — which excludes costs for groceries and gas — picked up 0.6% in April from the prior month, faster than its 0.3% increase in March. That measure is particularly important for policymakers, who use it as a gauge to help determine where inflation is headed.
While the letup in annual inflation may have given President Joe Biden and the Fed a dose of comfort, the overall picture remains worrying. Policymakers have a long way to go to bring price increases down to more normal and stable levels, and the newest data is likely to keep them focused on trying to slow an inflation rate that remains near its fastest pace in 40 years.
“Inflation is too high — they need to bring it down,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “The re-acceleration in core inflation is unwelcome.”
The report renewed fears among investors that the Fed could speed up plans to raise interest rates, which would further take steam out of the stock market. The S&P 500 fell 1.6%, extending a five-week slide that has taken it to the cusp of a so-called bear market — a drop of more than 20% from a recent peak. At the close of trading, the index was 18% below its January record high. The tech-heavy Nasdaq composite, which has been in a bear market for months, fell 3.2%.
Annual inflation may have peaked, having climbed by an even-quicker 8.5% in March. It slowed down in April partly because gas prices dropped, and partly because of a statistical quirk that will continue through the months ahead. Yearly price changes are being measured against elevated price readings from last spring, when inflation started to take off. The higher base makes annual increases look less severe.
Still, even the White House greeted the new report with concern.
“While it is heartening to see that annual inflation moderated in April, the fact remains that inflation is unacceptably high,” Biden said in a statement. “Inflation is a challenge for families across the country, and bringing it down is my top economic priority.”
Economists do expect price increases to continue to ebb somewhat this year because they think that consumer demand will taper off and supply-chain stresses will ease. The crucial question is how much and how quickly that moderation might happen.
Many analysts have been predicting a slowdown in price increases or even outright price cuts on many goods, but those forecasts look increasingly uncertain. Lockdowns in China and the war in Ukraine threaten to exacerbate supply shortages for semiconductor chips, commodities and other important products.
“There are persistent issues in supply chains,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “And the most recent developments have not been positive.”
Part of the increase in core inflation in April owed to trends that should not last, most notably a big pop in airfares as travel demand surges following the latest wave of the coronavirus. Even so, Rosner-Warburton said she expected annual CPI inflation to remain at 5.1% at the end of the year, far above levels that prevailed before the pandemic.
The Fed aims for 2% annual inflation on average, though it defines that goal using a related but different measure that tends to run slightly lower and comes out with more of a delay. That inflation index picked up 6.6% in the year through March, and April figures will be released later this month.
The fact that high inflation is lasting so long is a problem for the central bank. After a full year of unusually swift increases, household and investor expectations for future price changes have been creeping higher, which could perpetuate inflation if households and businesses adjust their behavior, asking for bigger raises and charging more for goods and services.
As such risks have mounted, the Fed has begun to lift interest rates to try to keep price increases from galloping out of control in a more lasting way. In March, Fed policymakers lifted their main policy interest rate for the first time since 2018, then followed that up with the biggest increase since 2000 at their meeting last week.
By making it more expensive to borrow money, officials hope to weaken spending and hiring, which could help supply to catch up with demand. As the economy returns to balance, inflation should come down.
Central bankers are hoping that their policies will temper economic growth without pushing unemployment up or plunging the U.S. into a recession — engineering what they often call a “soft landing.”
“I really want us to have that be the outcome, but I recognize that it’s not going to be easy to do,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said Monday.
Officials have roundly acknowledged that letting the economy down gently will be difficult, and some have suggested that they would be willing to inflict economic pain if that is what it takes to tackle high inflation.
If the economy gets to a point at which unemployment begins climbing, but inflation remains “unacceptably high,” Bostic said price increases would be “the threat that we have to take on board.”