Inflation is not as high as it was last year. The job market is not that hot. The economy is slowing down. But none of this is happening as quickly or as smoothly as Federal Reserve officials would like.
The latest evidence came on Friday as a series of government reports painted a picture of an economy generally moving in the direction policymakers want but taking time to get there.
“We knew inflation was going to be rocky and bumpy,” said Megan Greene, chief economist at the Kroll Institute. “We’ve found peak inflation, but it won’t be a smooth path down.”
Consumer prices rose 4.2 percent in March from a year earlier, according to the Fed’s preferred measure of inflation, the Personal Consumption Spending Index, the Commerce Department said on Friday. That was the slowest pace of inflation in almost two years, compared with a peak of 7 percent last summer.
But after factoring out food and fuel prices, a closely watched “core” index remained nearly flat last month. That metric rose 4.6 percent over the year, compared to 4.7 percent at the previous reading — a number that has been revised up slightly.
Meanwhile, wages continue to rise rapidly – good news for workers trying to keep up with the rising cost of living, but likely a concern for the Fed.
Labor Department data on Friday showed wages and salaries for private-sector workers rose 5.1 percent in March from a year earlier. That was the same growth rate as in December and defied forecasters’ expectations of a slight slowdown. A broader measure of compensation growth, which includes both benefits value and salaries, actually accelerated slightly in the first quarter.
The Fed has been raising interest rates for more than a year to cool the economy and bring inflation to the central bank’s target of 2 percent a year. Friday’s data is likely to reinforce policymakers’ belief that their work is not done – officials are widely expected to hike rates by a quarter of a point to just over 5 percent when they meet next week. That would be the central bank’s 10th straight rate hike.
Wage data is a particular focus for Fed officials, who believe the job market, with far more jobs available than workers to fill them, is pushing wages up at an unsustainable pace and contributing to inflation. Other measures had pointed to a more pronounced slowdown in wage growth than showed Friday’s data, which is less recent but widely viewed as more reliable
“If any Fed officials falter on a May rate hike,” Inflation Insights founder Omair Sharif wrote in a note to clients on Friday, “the payroll data will likely lead them to support at least one more rate hike.”
But a key question is what comes next. Central bankers predicted in March that they could halt rate hikes after their next move. Fed Chair Jerome H. Powell could explain whether this is still the case after the central bank’s interest rate announcement next week. The decision will depend on incoming economic and financial data.
Investors largely shrugged off the data on Friday morning, instead focusing on a week of robust earnings reports that suggest US companies are yet to fully feel the pressure from higher interest rates. The S&P 500 index rose 0.5 percent in midday trade. Treasury yields, which reflect the government’s cost of borrowing more money and are sensitive to changes in interest rate expectations, declined slightly.
The Fed faces a tricky task as it seeks to raise borrowing costs just enough to discourage hiring and ease wage pressures, but not so much that companies start laying off workers en masse.
Higher interest rates have already taken a toll on housing, industry and business investment. And data from the Commerce Department on Friday suggested consumers – the engine of the economic recovery so far – are starting to soften. After a sharp rise in January, consumer spending barely increased in February and stagnated in March. Americans saved their income in March at the highest rate since December 2021, a sign consumers may be becoming more cautious.
“You can see that some of that resilience is really wearing off a little bit at the start of the year,” said Stephen Juneau, an economist at Bank of America.
Many forecasters believe the recovery will continue to slow down in the coming months – or may already have done so. March’s data does not capture the full impact of the collapse of the Silicon Valley bank and the financial turmoil that followed.
“If you look at the data for the first quarter, this impression remains of a still robust economy and inflation that is still too high and too stubborn,” said Gregory Daco, chief economist at EY consulting firm, formerly known as Ernst & Young. If there were real-time data on spending, credit standards, and business investment, “that would paint a very different picture than the first-quarter data.”
The challenge for Fed officials is that they cannot wait for more complete data to make their decisions. Some evidence points to a more severe slowdown, but other signs suggest consumers will continue to spend and businesses will continue to hike prices.
“If we see inflation that justifies us having to accept additional prices, we will accept it,” Brian Niccol, chief executive of burrito chain Chipotle, said during a earnings call this week. “I think we’ve now demonstrated that we have pricing power.” The company increased its menu prices by 10 percent in the first quarter from the same period last year.
Wage growth is a particularly sensitive issue for the Fed. Faster wage increases have helped workers, particularly those at the bottom of the income ladder, to keep up with soaring prices. And most economists inside and outside the Fed say wage growth was not a major cause of recent hyperinflation.
But Fed officials worry that if companies have to keep raising wages, they’ll have to keep raising prices as well. That could make inflation difficult to contain, even if the pandemic-era disruptions that caused the initial jump in prices abate.
“As an employee, it always feels good to see more money in your paycheck,” said Cory Stahle, an economist for the Indeed job board. “But it also feels bad to go to the store and pay five bucks for a dozen eggs.”
Joe Rennison contributed reporting.
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