Contact Me By Email

Contact Me By Email

Wednesday, July 12, 2023

Consumer price index eases in June as Fed debates rate hikes - The Washington Post

Inflation eased further in June as economy slowly cools

"But the Federal Reserve isn’t ready to declare victory yet, especially since not every source of inflation is fading at the same time or with the same momentum

A woman at a Target in Upper Saint Clair, Pa., on Friday. (Gene J. Puskar/AP)

A year after inflation soared to the highest level in four decades, prices are returningcloser to normal levels, with families and businesses feeling the difference as policymakers debate how much more to slow the economy.

Government data released Wednesday showed a notable drop in inflation: Prices rose 3 percent in June compared with the year before, and 0.2 percent compared with May. That marked progress from the last inflation report, when prices rose 4 percent compared with the previous year.

“After two years of searing inflation, American households are finally experiencing relief as inflation falls and real wages increase,” said Joe Brusuelas, chief economist at RSM.

The latest data reflects a drastically different economic picture than June 2022, when inflation peaked at 9.1 percent, just months after Russia’s invasion of Ukrainesent energy prices soaring. Still, policymakers at the Federal Reserve aren’t ready to declare victory yet, especially since not every source of inflation is fading at the same time or with the same momentum.

But there are encouraging takeaways. Inflation continues to move in the right direction without triggering unwanted consequences elsewhere in the economy. Typically, when the Federal Reserve has had to quickly raise interest rates, a recession follows and the job market suffers. That hasn’t happened.

Instead, major banks are backing away from their bold recession predictions as the job market notches its 30th consecutive month of growth. The housing market, too, is showing signs of improvement as more homes come online. Rents are finally starting to drop from pandemic highs, though they remain a major driver of overall inflation. Used car prices are also expected to ease.

If those trends continue, it would mean the Federal Reserve has managed to hoist interest rates more than 5 percentage points without grinding the economy to a halt. At their most recent meeting in June, the Fed held rates steady for the first time in over a year to give officials time to gather data on inflation, economic growth, jobs and wages. Rate hikes affect the economy with imprecise and unknown lags, and the risk is that any additional increases — the central bank is projecting two by the end of the year — will pile onto the braking effect that’s still coming. The repercussions of the spring banking crisis, too, are expected to slow the economy as banks pull back on lending, but no one knows how much.

“The data have come in [with] surprising strength, with inflation persistently printing too high,” San Francisco Fed President Mary Daly said at the Brookings Institution on Monday. “So against that backdrop you think, ‘Well, there’s more that we need to do.’”

But Daly added, “We also had the banking stresses in March, and those banking stresses can act as a credit shock … So we’re balancing the risks to the economy going forward against the incoming information, which is about strength.”

Policymakers pay close attention to how families and businesses respond or adapt to inflation. Price jumps can come from supply chain backlogs, worker shortages or energy price spikes. But they can also result from a psychological phenomenon: If people change their behavior now to account for inflation they fear is coming, trying to raise prices or buy up items ahead of the curve, that could make the Fed’s fight to stabilize the economy even harder.

In Durham, N.C., Scott Pearce has had to raise prices across the board at his business, For Garden’s Sake, because costs for machinery, supplies and hourly pay for entry-level lawn mowers have climbed. Pearce saw demand for his garden supply, landscaping and lawn maintenance services explode during the pandemic, as stuck-at-home customers decided to revamp their entire properties. That frenzied phase is over, and in the “new normal,” he’s more likely to hear from customers who spend money on their patios now but wait to tackle shrubs a few months down the line.

But Pearce is growing his company even in the face of so much uncertainty. He just filled a new sales role and got a truck delivered to expand fertilization services.

“I don’t want to be irresponsible,” Pearce said. “We could sit and be scared, but part of it is, in our area, people are still spending … These are things they’re probably going to do no matter what. That’s how we’re handling it.”

Richard Farino’s outlook is grimmer. The owner of District Angling, a fly-fishing shop in Arlington, Va., said he hasn’t seen this kind of drop in customer activity since the Great Recession. He pointed to waning consumer confidence in the economy that leads people to spend less on activities and hobbies.

Farino is still contending with supply chain issues for the basics, like the hairs and feathers needed to make and sell flies. He feels pressure to raise prices as manufacturers increase their own costs, and worries about how much longer he can stay afloat.

“We are not a store for needs. We’re a store for wants,” Farino said. “And when people start feeling the pinch, they stop doing recreational stuff.”

Consumer price index eases in June as Fed debates rate hikes - The Washington Post

No comments:

Post a Comment