top of page
Search
Writer's pictureThe San Juan Daily Star

Inflation is cooling, leaving America asking: What comes next?


Putting gas in the tank at a station in Manhattan, Jan. 11, 2023. After six months of declines, inflation seems to be turning a corner, but the road back to normal is still an uncertain one.


By JEANNA SMIALEK


Martin Bate, a 31-year-old transportation planner in Fort Worth, Texas, spent the middle of 2022 feeling that he was “treading water” as high gas prices, climbing food costs and the prospect of a big rent increase chipped away at his finances.


“I was really starting to feel financially squeezed in a way that I hadn’t felt ever before, since finishing college,” Bate said. Since then, he has received a promotion and a raise that amounted to 12%. Gas prices have fallen, and local housing costs have moderated enough that next month he is moving into a nicer apartment that costs less per square foot than his current place.


“My personal situation has improved a good amount,” Bate said, explaining that he’s feeling cautious but hopeful about the economy. “It’s looking like it might shape out all right.”


People across the country are finally experiencing some relief from what had been a relentless rise in living costs. After repeated false dawns in 2021 and early 2022 — when price increases slowed only to accelerate again — signs that inflation is genuinely turning a corner have begun to accumulate.


Inflation has slowed on an annual basis for six consecutive months, dipping to 6.5% after peaking at about 9% in the summer, partly as gas has become cheaper. But the deceleration is true even after volatile food and fuel are stripped out: So-called core consumer prices have climbed 0.3% or less for each of the past three months. That’s faster than the 0.2% month-to-month changes that were typical before the pandemic but much slower than the 0.9% peak in April 2021.


America may have reached an inflection point on inflation at last. The question now centers on what will happen next.


Some economists expect inflation to remain stubbornly faster than before the pandemic, while others anticipate a steep deceleration. Some anticipate something in between. Which prospect plays out matters enormously: The speed and scope of the inflation cooldown will inform how high Federal Reserve policymakers raise rates, how long they leave them elevated and how much pain they inflict on the economy.


For now, the staggering uncertainty has prompted Fed officials to come out in favor of further slowing — but not stopping — their interest rate increases at their Jan. 31 and Feb. 1 meeting. Officials pulled back from their previous three-quarter-point increases to a half-point move in December, and many support raising rates this time by just a quarter-point. Moving more gradually would give policymakers more of a chance to see how the economy was developing, lessening the risk that they drive the economy off a cliff.


“If you’re on a road trip and you encounter foggy weather or a dangerous highway, it’s a good idea to slow down,” Lorie Logan, president of the Federal Reserve Bank of Dallas, said during a speech last week. The same considerations that prompted central bankers to decelerate in December “suggest slowing the pace further at the upcoming meeting.”


As officials and economists try to figure out what will happen with inflation, the fate of everyday Americans hangs in the balance. If the Fed slows down the economy too much in its bid to control prices and causes a steeper recession than is necessary, people will pay with their jobs.


But if continued rapid price increases chip away at pay gains and erode savings, that will also leave households worse off.


“I do worry about the future, I have to say,” said Karen Loeb, a 71-year-old adjunct sociology professor in Amherst, Massachusetts. She has been shopping at thrift stores and baking her own challah after watching the prices of goods and groceries rocket higher over the past two years.


For people like Loeb, as well as for central bankers, there are key reasons to hope that inflation will moderate notably in 2023.


Housing costs are still rising in official price data, but real-time rent trackers show steep slowdowns in asking rents. Economists expect that to feed through to inflation data over the coming months.


When it comes to cars, used — and, more recently, new — inventory has been improving, which is already beginning to lead to declines in automobile prices. And a broad range of other goods prices are slowing their ascent or dropping as shipping costs fall back to the pre-pandemic levels and supply shortages ease.


While rapid goods inflation was touched off by the supply problems, it was also partly a function of strong demand: Consumer spending on household and other products has been elevated since 2020, in part because families took government stimulus payments and the money they saved during pandemic lockdowns and spent it on renovations or camping gear. But demand is waning as savings slowly erode.


Plus, the Federal Reserve raised interest rates from near zero to above 4.25% last year, which could weigh on consumer spending and make it harder for firms to institute big price increases without scaring away shoppers.


“It seems like a very prolonged supply shock — to some extent a demand shock — that we’ve endured,” said Omair Sharif, founder of Inflation Insights. “Those things seem pretty clearly on the road to normalization.”


Encouragingly, prices of more than just a few goods or services are showing slowdowns. The share of product categories with inflation above 3% declined from almost three-fourths in early 2022 to less than one half in December, Christopher Waller, a Fed governor, said in a speech last week.


But risks remain, because it is unclear whether the forces now dragging inflation down will be enough to quickly return prices to an annual pace of 2%, the Fed’s goal.


Wage growth is already showing some signs of slowing, and the Fed will receive another employment cost index report the day before its Feb. 1 rate decision.


While other labor indicators have been more resilient, Fed officials predicted in their latest economic forecasts that unemployment would rise to 4.6% by the end of the year, from 3.5% now.


While that would hurt some households, Fed officials still hope for a relatively soft landing. In light of recent inflation data, even Lawrence H. Summers, a Harvard economist and former Treasury secretary who has been warning that the economy could be heading for a sharp downturn, has upgraded America’s chances of avoiding a painful recession.


“Soft landings are the triumphs of hope over experience, but sometimes hope does triumph over experience,” Summers said in an interview with Bloomberg Television last week.


21 views0 comments

Recent Posts

See All

Commentaires


bottom of page