Inflation Cools Notably, but It’s a Long Road Back to Normal

WASHINGTON—Inflation eased particularly in March as falling gas prices helped pave the way for the slowest price rise in nearly two years, bringing relief to many American consumers and the Federal Reserve. provided some evidence that the Association had campaigned to cool the economy by raising interest rates. The economy is picking up.

consumer price index 5 percent increase It has decreased over the year from 6% in February to March. This marked the slowest pace of price increases since May 2021.

However, the details of the report highlight that inflation has held up in terms of staying power beneath the surface. The so-called core index, which aims to give a clearer picture of price dynamics by removing food and fuel costs, rose. Increased by 5.6% year-on-year. This was up slightly from his 5.5% increase in February and marked the first annual increase since September.

Taken together, the latest inflation data suggested that price gains were slowing significantly, but progress remained modest. Comes in an economic moment. The central bank is the government’s main inflation fighter and has been working to bring inflation back under control for just over a year. Most recently, it raised interest rates from near zero to nearly 5% in March 2022, slowing and weighing on the economy. Cost reduction.

Officials are now assessing how policy changes are working and trying to determine if more needs to be done to bring price increases fully under control. The inflation rate is about 9 percent Last summer, but the process was slow. We have a long way to go before we return to the 2% inflation rate that was normal before the pandemic hit in 2020.

Uncertainty about how quickly price increases will fully subside has been exacerbated by recent developments. Last month’s string of high-profile bank failures could dampen the economy, but by how much is unclear. Some Fed officials are urging caution given the turmoil, while others warn the Fed needs to step on the economic brakes and stay focused on fighting rising prices. There is

Brelina Urchi, chief U.S. economist at T. Rowe Price, said the new data likely “solidifies the case that the Fed will raise rates further in May and proceed cautiously from there.” She said the new report provided good news, but “it will take time to bring inflation down”.

The Federal Reserve’s inflation target of 2% is defined using a different metric. The Personal Consumption Expenditure Index uses data from the Consumer Price Index, but is calculated differently and will be released in the coming weeks. The measure also soaredalthough it is also easing.

The White House welcomed Wednesday’s latest inflation news, emphasizing that a slowdown in inflation means more “breathe” for families.

“Today’s report shows continued progress in the fight against inflation,” Biden said in a statement.

Both stocks and bonds saw little change as financial markets calmed down after the data was released, suggesting investors see the numbers as in line with the current economic outlook.

But the report also points to less-optimistic milestones. Inflation has been high for the second year in a row since it first started rising in March 2021.

Soaring commodity prices initially boosted inflation in the year, but that weakened as supply chains recovered and product shortages eased. And a sharp rise in fuel prices caused inflation to accelerate sharply, which is now receding. today, most of the country’s inflation comes from service costs, including purchases of rent, hotel rooms, manicures, insurance, childcare, etc.

As such, the Federal Reserve is closely monitoring the cost of services to determine if price increases are poised to slow down, with a modest decline in March. One measure of services, excluding housing and fuel-related prices, produced by Bloomberg showed he eased to 5.7% on an annualized basis in March.

“There are detailed signs that we are making progress towards a slowdown in inflation,” Uruch said. “It’s not where it needs to be, but it’s progress.”

In a development that has caught the attention of many economists, the rent for the main dwelling 0.5% increase It decreased from 0.8% in the previous month. Housing inflation is expected to slow overall in 2023, and it appears to be starting to take hold sooner than many expected.

“It’s unusual to see shelters eased so much,” said Neil Dutta, head of economic research at Renaissance Macro. He said.

But these hopeful signs do not necessarily mean that inflation will decline smoothly and quickly. Last month’s sharp slowdown in the overall index may not continue, as it was due to a decline in gas prices that is likely to be unsustainable.Real-time pump price tracker created by AAA indicated Unleaded petrol prices rose from last month.

And inflation reports continue to show rapid price increases in other categories, such as new cars and hotel rooms.

Given how stubborn inflation has proven, some central bankers are suggesting that interest rates may need to be raised further to keep inflation under control.

Federal Reserve Board Latest quoteAnnounced shortly after the failures of Silicon Valley Bank and Signature Bank in March. Central bank announces next policy decision May 3rd.

New York Federal Reserve Bank President John C. Williams said on Tuesday that the Fed has more to do to keep inflation down, and forecasts for the central bank to raise rates by another quarter of a percentage point in March. not yet”reasonable starting point“

But Chicago Federal Reserve President Austan D. Goolsby said hours later that recent bank failures have made it harder for businesses and consumers to access credit, slowing the economy and increasing uncertainty. , suggested that “we need to be cautious.”

“Until we collect more data and see how effective the headwinds are in lowering inflation, we should be wary of aggressive rate hikes,” Goolsby said.

Rising interest rates have made it much more expensive to borrow money to buy a home or expand a business. That is the slowdown in economic activity. The labor market is softening as demand cools.

For the latest job market data, few open positions Job growth remained strong, but slowed in March. And once employers proved they had lost their enthusiasm for hiring, wage growth began to return to a more normal pace.

Many economists believe it could lead to lower inflation. If wages are rising rapidly, employers may charge consumers more to cover increased labor costs, and those customers may be able to pay higher prices. , as households become increasingly cash-strapped, it may be difficult for businesses to raise prices without scaring off shoppers.

Dutta expects the Fed to pause in May in light of upcoming data, but investors are mostly looking for interest rate moves. In any case, the central bank’s ultimate goal, he said, was likely to be to moderately push the economy down and keep inflation under control without triggering a major recession in a so-called soft landing.

“On the margins, the inflation data were encouraging,” he said. “My view is that when you take all the data out there and put it all together, you can bring the soft landing story to life.”