Fed Inflation Driven by the Recent Rate Increases in the Personal Consumption Expenditures Measure: Predictions for the Next Four Decades
Fresh inflation data released Thursday showed that the consumer prices climbed more quickly than expected, bad news for the Federal Reserve as it tries to bring the most rapid price increases in four decades back under control.
The Personal Consumption Expenditures inflation measure, which is produced by the Commerce Department and is the measure the Fed officially targets as it tries to achieve 2 percent annual inflation, climbed by 6.2 percent in the year through August. While that was a slowdown from 6.4 percent in July, it was higher than the 6 percent economists in a Bloomberg survey had expected.
Inflation has been moderating somewhat on an overall basis partly because gas prices are declining. In the year through August inflation went up by 49 percent after stripping out food and fuel. The previous month, the rate was 4.7%. On a monthly basis, the core index picked up by 0.6 percent, a rapid pace of increase that was the fastest since June.
Because inflation has lingered for more than a year and a half and has expanded, central bankers are likely to remain focused on keeping inflation low.
After stripping out volatile food and fuel, the core index increased more than expected, which is important because you’re not seeing the underlying trends in inflation.
The figures will be closely watched by Fed officials as well as Wall Street analysts. The monthly numbers give a clearer picture of what prices are doing in real time, while the annual numbers only reflect what has happened cumulatively over the past year.
Supply chain obstacles have fallen and consumers are focused more on areas like leisure and hospitality, which has contributed to the recent moderation in inflation.
The Fed aims for 2 percent annual inflation on average, though it defines that using a different inflation gauge: the Personal Consumption Expenditures measure, which will not be released until late October.
In its seven meetings starting in March, the central bank’s policymaking arm raised its benchmark interest rate by a cumulative 4.25 percentage points. The sharp hike in rates has started to filter through the economy, its effects showing up first in areas such as real estate, where mortgage rates were 6.27% this week, more than double the rate seen last year at this time, according to Freddie Mac data.
The trend has begun to reverse, at least on a monthly basis. Consumers will have a lot more money to spend next year because real wages are growing faster than consumer prices.
Many types of service inflation are closely intertwined with what’s happening in the job market. For companies including hair salons, restaurant chains and tax accountants, paying employees is typically a major, if not the biggest, cost of doing business. Businesses are more likely to raise their prices when there are fewer workers and more money in their pockets.
That means that today’s low unemployment and rapid wage growth may help to keep inflation in check, even though the job market did not drive the initial burst of inflation.
That is where Fed policy could come in. Companies can only charge more if their customers are able — and willing — to pay more. The Fed can stop that chain reaction by lifting interest rates to slow demand.
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The latest government reading shows inflation is running at its lowest annual rate in a year.
“It’s good to see progress but we have a long way to go to return to price stability,” said the Fed Chairman after the board decided to raise rates by a smaller amount.
Many Americans are paying more in interest on their loans because of the price increases they have already experienced. Currently, used car buyers are charged an average interest rate of 9.34%, compared to 8.12% last year, and they’re making the largest monthly payments on record, according to credit reporting firm Experian.
The central bank said that inflation remained elevated due to supply and demand imbalances in the food and energy markets.
The stock market fell after the announcement of another increase and as Wall Street accepted the Fed’s warning of more rate hikes to come. Major indexes were mostly flat by mid-afternoon, despite the fact that stocks recovered.
The Fed believes the worst of shelter inflation may be behind us. Market rents have not increased as much as they did earlier in the year.
The price of haircuts and dry cleaning went up in the last year. Services other than housing and energy account for nearly a quarter of all consumer spending.
Source: https://www.npr.org/2022/12/14/1142757646/fed-federal-reserve-interest-rates-december-inflation-benchmark
The November Consumer Price Index and Producer Price Index Drops in the First Major Inflationary Month of 2022, and The Fed’s Open Market Committee Revised
“We see goods prices going down,” Powell said. “We understand what will happen with housing services. There’s not much progress in the rest of it, as the big story will be. It is going to take some time.
Powell said that the job market was out of balance, with too many jobs available than there were workers to fill them. While the US economy has returned to normal, the number of people who are employed or looking for work has not fully recovered.
Older workers who retired in the last two years may not return to the job market. With the supply of workers constrained, the Fed is trying to restore balance by tamping down demand.
Higher borrowing costs make it more expensive to get a car loan, buy a house, or carry a balance on a credit card. That is already curtailing demand in the sensitive parts of the economy, like the housing market.
The consumer price index and producer price index declined in recent months, and the annual increases for the PCE inflation indexes fell to their lowest levels since October of 2021.
Friday’s report also showed that spending continued to rise in November, but at a much slower pace than in previous months. Spending was up in November as opposed to the month before. Personal income increased by 0.4% in November, down from 0.7% in October.
The November PCE report, the last major inflation gauge released in 2022, provided a snapshot of an economy in transition. The Fed has taken a series of high interest rate hikes to slow the pace of inflation.
However, inflation within the services sector has been a little “sticky,” and not abating as quickly. Friday’s PCE report showed the services index posted a monthly increase of 0.4% – unchanged from October’s rate – and a year-over-year increase of more than 11%, Faucher noted.
The Fed is concerned that wage growth could fuel inflation since most of the services inflation is due to housing costs, which are rapidly reversing.
“The Federal Open Market Committee will continue to increase the fed funds rate in early 2023 until it becomes more apparent that the job market is cooling, and wage growth and services inflation are slowing to more sustainable paces,” he added.
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A separate Commerce Department report released Friday showed that new orders for manufactured goods tumbled 2.1% in November, the biggest monthly drop since the onset of the pandemic.
Transportation equipment, specifically new orders for non-defense aircraft and parts, drove the decline, according to the report. New orders without transportation increase by 2%.
Diane Swonk, chief economist for KPMG, commented after the report was out that core durable goods orders slowed but did not contract. “Manufacturing activity has begun to contract and prelim reading for December suggests it will contract further at year end. There is a cold winter expected for manufacturing.
According to data from the university’s surveys of consumers, the final December reading for the index of consumer sentiment came in at 59.7%, up slightly from a preliminary reading of 58.8% and November’s final reading of 57.8%.
The director of the Surveys of Consumers said that consumers welcomed the easing of inflation. “While sentiment appears to have turned a corner from its all-time low from June, consumers have reserved judgment about whether the trends will continue.”
She said that the outlook for the economy may have improved, but it remains weak. The sustainability of robust consumer spending is contingent on continued strength in incomes and labor markets in the quarters ahead.”
Earlier this week, the Conference Board’s consumer confidence index – another measure of how consumers are feeling about the economy – landed at its highest measurement since April 2022.
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It was a brutal period for the stock market, with roughly one-fifth of the value of the S&P 500 vanishing and the Nasdaq dropping by more than one-third. All three major US markets suffered their worst years — by far — since 2008.
There is surprisingly resilience to hiring. The economy added a robust 263,000 jobs in November, and the unemployment rate is just 3.7% — down dramatically from nearly 15% in the spring of 2020.
New numbers show that first-time applications for unemployment benefits went up last week. That is still historically low and near where it stood a year ago before the recession began.
“This is one reason to the be optimistic the economy could skirt a recession,” Moody’s Analytics chief economist Mark Zandi told CNN on Thursday. “Without mass layoffs, it’s unlikely consumers will stop spending and the economy suffer a downturn.”
The consumer prices went up by 7.1% in November. It would be alarmingly high at almost any other point in the past 40 years. But this marked the fifth-straight month of improvement and a significant cooldown from 9.1% in June. It is the lowest inflation rate in over a year.
After spiking above $5 a gallon for the first time ever in June, gas prices have plunged. The national average for regular gasoline recently dropped to $3.10 a gallon, an 18-month low, though it has crept higher in recent days to about $3.22 a gallon.
Source: https://www.cnn.com/2023/01/02/economy/recession-or-soft-landing-in-2023/index.html
Supercore Inflation: Implications for the Fed, Fed Chair, and the Economic Impact on the U.S. Long-Term Budgetary Crisis
The fear is that the Fed will eventually overdo it, raising rates so high and keeping them there for so long that it causes a recession — if the Fed hasn’t already done that.
The Federal Reserve isn’t ready to cut rates in the near term, Chairman Powell made it clear. Remove its foot from the brake would be a positive.
“Supercore inflation is still way too hot, but it has begun to cool off, and all signs point to it and overall inflation getting back to something more comfortable over the coming 12-18 months,” Zandi told CNN.
The Fed chair said that core services that exclude housing are important for understanding the future evolution of core inflation.
Over the past year, an alphabet soup of otherwise wonky economic statistics have become household names as American families suffered through the worst inflation in 40 years: CPI (Consumer Price Index), PPI (Producer Price Index), PCE (Personal Consumption Expenditures and ECI (Employment Cost Index).
Each of these reports has shown how prices for food and fuel and housing have risen much faster than wages for most of the past year, driven by huge consumer demand coupled with supply chain snags and the war in Ukraine.
But White House economists last week highlighted a wage-growth statistic that suggests inflation may not be as strong as the Fed believes. The White House Council of Economic Advisers says that the supercore wage reading fell in January from 8% to 5%.
He said that supercore includes prices that are more likely to be driven by the cost of labor and that the Fed can more directly impact through changes in interest rates.
“Pervasive price pressures across categories of spending that are necessities — shelter, food, electricity, apparel, vehicle insurance, and household furnishings and operations — show that broad-based improvement on the inflation front is still lacking,” said Greg McBride, chief financial analyst at Bankrate.
So there is a risk that January CPI could disappoint, McBride cautioned. Some of December’s rosy headlines came from falling gas prices, which have since reversed.