Inflation cools down noticeably, but it’s a long road back to normal

WASHINGTON — Inflation was brought under control significantly in March as falling gas prices helped pave the way for the slowest price hike in nearly two years, providing relief to many American consumers and some evidence that the war The Federal Reserve’s interest rate hikes and cooling down. the economy is starting to work.

Consumer price index 5 percent increase in the year to March, down from 6 percent in February. That marks the slowest rate of price increase since May 2021.

But the details of the report emphasize that inflation is still related to the strength that remains below the surface: The so-called core indicator aims to better understand price trends by removing real costs. Products and fuels, both of which can be volatile, were up 5.6% from a year earlier. This is up slightly from February’s 5.5% increase, and it marks the first acceleration in annual numbers since September.

Overall, the new inflation data suggests that the price increase is moderately significant, but progress is slow. And that mixed signal comes at a challenging economic time for the Fed. The central bank is the government’s main anti-inflation tool and it has been trying to control price increases again for more than a year, raising interest rates to almost 5% from near zero in March 2022 to slow down economy and considerations. Cut the cost.

Officials are currently assessing how their policy changes are working, and they are trying to gauge whether they need to do more to ensure that price hikes are fully under control. or not. Inflation has decelerated after peaking about 9 percent last summer, but the process has been slow. There is still a long way to go to return to normal 2% inflation before the pandemic broke out in 2020.

Uncertainty about how quickly and completely the upside will cool down is increased by recent developments. A series of high end bank explosion last month could hold back the economy — possibly even enough to push the economy into a mild recession later this year, based on Fed staff forecasts. Some Fed officials are calling for caution in the face of the turmoil, even as others warn that the central bank should continue to hold back the economy and continue to focus on the fight against rising prices. High.

Blerina Uruci, chief US economist at T. Rowe Price, said the new data could “reinforce the possibility of the Fed making another rate hike in May and proceed with caution from here”. She said the new report brings good news, but “it will take time to bring down inflation.”

Fed officials’ 2% inflation target was determined using another metric: the Personal Consumption Spending measure, which uses some data from the consumer price measure but is calculated differently. and published a few weeks later. That measure was also strongly increasedalthough it also has a measure.

The White House welcome the latest inflation news on Wednesday, stressing that slower price increases mean more “breathing room” for families.

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

As financial markets stabilized after the data was released, both stocks and bonds were little changed, suggesting that investors view the numbers in line with the current outlook for the economy.

However, the report also marks a less optimistic milestone: Inflation in the US has been at a two-year high now, first starting to rise in March 2021.

The initial spike in commodity prices pushed inflation higher that year, though that waned as supply chains recovered and product shortages were resolved. Likewise, the sharp increase in food and fuel prices associated with Russia’s invasion of Ukraine in 2022 accelerated inflation but have now dropped again. Today, much of the country’s inflation comes from the cost of services, including purchases such as rent, hotel rooms, manicures, insurance, and childcare.

As a result, the Fed is keeping a close eye on service costs to see if the price hikes are poised to subside — and they cooled somewhat in March. A gauge of services, excluding housing and fuel-related prices, produced by Bloomberg showed a drop of 5.7% on an annualized basis in March, which is a solid number. but slower than 6.1% in February.

“There are detailed signs that we are making some progress in slowing inflation,” Ms. Uruci said. “It’s not a place to be, but it’s progress.”

In a development that has caught the attention of many economists, primary housing rents 0.5 percent increase month-over-month, down from 0.8 percent in the previous reading. Housing inflation is generally expected to slow down in 2023, and that seems to be starting to happen sooner than many expected.

“When you see the haven of censorship as much as it used to, it’s an anomaly,” said Neil Dutta, head of economic research at Renaissance Macro. “Controlling rental inflation came a little earlier than anticipated.”

But those hopeful signs do not necessarily mean that inflation will decline smoothly and quickly. The sharp decline in the overall index last month may not continue, as a large part of that drop was due to falling gasoline prices that are unlikely to sustain for long. Real time pump price tracker made by AAA shows that the price of unleaded gas has increased since last month.

And the inflation report continues to show rapid price increases in other categories, including new vehicles and airline tickets.

Given how stubbornly price increases have been demonstrated, some central bankers have suggested that they may need to raise interest rates further to fully rein in inflation.

US Federal Reserve latest estimate, released shortly after the collapse of Silicon Valley Bank and Signature Bank in March, hinted that officials could raise interest rates by a quarter point this year, above 5%. The central bank will announce the next policy decision on May 3.

But minutes from that meeting — released Wednesday — suggests that officials want to keep their options open when it comes to future rate hikes. They see bank explosions as a major risk to the economic outlook, and Fed staff predict that the U.S. economy will likely enter a “mild” recession later this year in the wake of the turmoil. chaos.

Since then, central banks have continued to be hesitant about the path to rate hikes.

On Tuesday, John C. Williams, president of the Federal Reserve Bank of New York, said the Fed still has a lot of work to do to reduce price gains and cited the central bank’s March forecast for a rate hike. adding a quarter point is still One”reasonable place to start.”

But Austan D. Goolsbee, president of the Federal Reserve Bank of Chicago, several hours later suggested that recent banking failures could make access to credit more difficult for businesses and consumers, slowing the economy, causing uncertainty and creating the “need for caution”.

“We should collect more data and be careful about raising rates too aggressively until we see how much headwinds are doing us in reducing inflation,” Mr Goolsbee said.

And Mary C. Daly, president of the Federal Reserve Bank of San Francisco, hinted Wednesday that further rate moves may or may not be needed.

“Going forward, there are good reasons to think that policy may need to tighten further to reduce inflation,” she said at an event in Salt Lake City, Utah. “But there are also good reasons to think the economy could continue to slow, even without additional policy adjustments.”

Higher interest rates make it much more expensive to borrow money to buy a home or expand a business. That is slowing down economic activity. As demand cools, the labor market is softening.

The latest job market data suggests that fewer open positions waiting to be filled, and job growth still steady but slow March. And as employers appear less eager to hire, salary increases have begun to return to a more normal pace.

Many economists say that could help pave the way for inflation to cool. As wages rise rapidly, employers can charge consumers more to try to cover their increased labor costs, and those customers can afford to pay higher wages. Higher price. But as households become tighter, it may be harder for businesses to raise prices without scaring off shoppers.

Mr. Dutta expects the Fed to pause in May based on the upcoming data, although investors are mostly forecasting a rate change. And in any case, he said, the central bank’s ultimate goal — bringing down the economy gently, cooling down inflation without triggering a major recession in a so-called soft landing — more likely to happen.

“On the sidelines, the inflation data is very encouraging,” he said. “When I look at the totality of all the data coming out, my own view is that you can breathe life into the gentle landing story.”

Joe Rennison contributed reporting.