Inflation is not as high as last year. The job market is not that hot. The economy is slowing. But it’s not going as quickly or as smoothly as Federal Reserve officials would like.
The latest evidence came Friday when a series of government reports painted a picture of an economy that is generally heading in the direction policymakers want, but is taking time to get there.
“We knew inflation would be volatile and volatile,” said Megan Green, chief economist at the Kroll Institute.
The US Commerce Department said Friday that consumer prices rose 4.2% in March from a year earlier, according to the Fed’s favorite measure of inflation, the Personal Consumption Expenditure Index. This was the slowest rate of inflation in nearly two years, down from his 7% peak last summer.
But after removing food and fuel prices, the closely watched ‘core’ index remained largely stable last month. Did. The figures have been slightly revised upwards.
Meanwhile, wages continue to rise rapidly, which is good news for workers trying to cope with rising costs of living, but could be a concern for the Fed.
Wages and salaries of private sector workers rose 5.1% in March from a year earlier, according to Labor Department data on Friday. This was the same growth rate as his December, beating forecasters’ expectations of a gradual slowdown. The broader measure of compensation growth, which includes the value of benefits as well as salary, actually accelerated slightly in the first quarter.
The Federal Reserve (Fed) has been raising interest rates for over a year to cool the economy and bring inflation down to the central bank’s target of 2% a year. Friday’s data are likely to bolster policymakers’ confidence that their job is not done – officials widely say they will hike interest rates by a quarter of a percentage point to just over 5% at next week’s meeting. expected. This will be the central bank’s 10th consecutive rate hike.
Wage data are of particular interest to Fed officials, who say there are far more jobs in the labor market than they fill workers, pushing wages up at an unsustainable rate and contributing to inflation. Other indicators point to a sharper slowdown in wage growth than indicated by Friday’s data, which is less timely but is generally considered more credible.
In a note to clients on Friday, Omaia Sharif, founder of Inflation Insights, said: “If Fed officials were upset by May’s rate hike, wage data should give them at least one more rate hike. It is highly likely that it will,” he wrote.
But the key question is what happens after that. The central bank predicts he may stop raising rates after the next move in March. Fed Chairman Jerome H. Powell can explain whether that is still the case after next week’s central bank interest rate announcement.
Investors largely ignored Friday morning’s data, instead focusing instead on strong earnings reports that suggested U.S. companies weren’t feeling the pinch of rising interest rates yet. The S&P 500 index rose 0.5% in midday trading. Yields on government bonds, which track the cost of borrowing more money for governments and are sensitive to changes in interest rate expectations, fell slightly.
The Federal Reserve is trying to raise borrowing costs just enough to discourage hiring and ease pressure on wages, but not so delicately that companies start laying workers off en masse. are facing
Rising interest rates are already hitting housing, manufacturing and business investment. And Friday’s Department of Commerce data suggested that consumers, so far the engine of the economic recovery, are starting to wane. Private consumption grew little in February and was flat in March after he rose sharply in January. In his March, the American saved his income at the highest percentage since December 2021. This indicates that consumers may be becoming more cautious.
“The strength at the start of the year is actually starting to reverse a bit,” Bank of America economist Steven Junod said.
Many forecasters believe the recovery will continue to slow in the coming months. Or it may have already slowed down. The March data do not fully capture the impact of the Silicon Valley bank failure and subsequent financial turmoil.
EY chief economist Gregory Daco said: “The first quarter data left the impression that economic activity remains strong and inflation is still too high and persistent.” Consulting firm formerly known as Ernst & Young. With real-time data on spending, credit metrics and business investments, “you’re going to see a very different picture than what the first quarter data shows,” he said.
The challenge for Fed officials is that they cannot wait for more complete data to make decisions. Some evidence points to a more substantial slowdown, but other signs suggest consumers continue to spend and businesses continue to raise prices.
“If we see enough inflation that we need to raise the price, we will take it,” said Brian Nicholl, chief executive of burrito chain Chipotle. Announcement of financial results this week. “I think we’ve now proven we have pricing power.”
Wage growth is a particularly thorny issue for the Fed. Accelerating wage growth is helping workers, especially those at the bottom of the income ladder, to keep up with rapidly rising prices. And most economists inside and outside the Fed say wage growth is not the main reason for the recent high inflation.
But Fed officials worry that if companies need to keep raising wages, they will also need to keep raising prices. So even if the pandemic-era turmoil that caused the initial price hike recedes, it could prove difficult to keep inflation under control.
“As a worker, it’s always nice to get a pay rise,” said Corey Stahl, an economist at job site Indeed. “But I also don’t feel like walking into a store and paying $5 for a dozen eggs.”
Joe Rennison contributed to the report.
