The Bureau of Labor Statistics’ latest inflation report on Wednesday is expected to show that increases in the price of goods and services are slowing.
Unfortunately, that won’t bring much comfort to consumers, who can expect to see their wallets tighten for a while longer.
The BLS reported last month that the consumer price index rose 6% year-on-year in February – below the 9% high last June but still well above the Federal Reserve’s target of 2%.
With inflation figures closely linked to decisions by the Federal Reserve on what interest rates should be, a majority of investors are betting that the Fed will hike rates again by 0.25% at its next meeting on May 3rd.
Analysts say some of the key drivers of the post-pandemic rise in inflation, such as supply chain problems and elevated food and energy prices, which were fueled in part by the war in Ukraine, are easing. But the flames of inflation are still being fanned by a still-hot job market that added 1 million jobs in 2023.
It’s an unfortunate trade-off: workers who feel secure about their job are happy to spend, which creates demand in the economy that can lead to price spikes.
By raising interest rates, the Federal Reserve hopes to make investing, borrowing and ultimately hiring more expensive for businesses.
“There’s an imbalance between supply and demand,” said Greg McBride, Bankrate’s senior vice president and chief financial analyst. “Well, this imbalance still stems from outsized demand. Unemployment is at a 50-year low and spending is quite high, and it’s that demand that the Fed is trying to meet by raising interest rates.”
In a recent note to clients, Seema Shah, Principal Asset Management’s chief global strategist, said US inflation is expected to slow further later this year, “but only very slowly”.
“Slower economic activity and a looser labor market” — most likely meaning an unemployment rate higher than the current 3.5% — “will be needed to ease these pressures,” Shah said.
A “for rent” sign outside a Los Angeles apartment building on September 22.Allison Dinner / Getty Images file
Grocery and rentals are among the categories that continue to show the biggest price increases. In February, food prices rose about 10%, continuing a streak of double-digit 12-month gains dating back to May.
In the same month, rents posted their largest one-month increase on record, rising 8.2%. Rental data is considered a “lagging” indicator, meaning surveys are slower to capture real-time changes as most rental contracts are at least 12 months long. Other data from Realtor.com shows rental growth peaked sometime during the winter of 2021-22.
In fact, prices in other areas of the economy are cooling significantly. While gas prices rose more than 13 cents last month to $3.61 a gallon, they are still down from $4 a year ago.
Wage growth is slowing
Meanwhile, wage growth has started to show sharp declines after taking a hit during the coronavirus pandemic. According to data released by Goldman Sachs, workers’ earnings are growing at less than 5% each quarter, compared with 8% in 2021. And wage growth for lower-paid workers, represented by leisure and hospitality positions, has declined by less than 6% % after rising to around 18% in winter 2021/22.
“We see the slowing in wage growth alongside a further decline in the unemployment rate as underpinning our long-standing view that much of the breach in peak wage growth is due to temporary factors” – mainly pandemic-related causes such as cyclical controls and reduced labor supply and energy price spikes, which are driving workers to do so prompted to demand higher wages, Goldman Sachs economist David Mericle wrote in a note to clients on Friday.
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“All of these have faded in whole or in part on their own and seem to have solved much of the problem of slowing wage growth to the 3.5% pace that we believe would be consistent with 2% inflation,” Mericle continued.
As a result, he said, there is less urgency for the Fed to continue raising interest rates aggressively.
But Bankrate’s McBride said even if inflation continues to slow, it will not reverse immediately. Only on rare occasions – and not even during some recessions – do prices fall annually.
Conclusion: The higher prices that have become a hallmark of the post-pandemic US economy are here to stay.
“The hoped-for inflation moderation does not mean that prices will fall. It just means they’re not going up as fast,” McBride said.
“The inflation we’ve seen in recent years has increased household spending, essentially rebasing it, and that spending will not fall across the board. They may not rise as quickly.”
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