Consumer price growth slowed again in January, the latest sign that the high inflation that has plagued Americans for two years is slowing.
At the same time, Tuesday’s consumer prices report from the government showed that inflationary pressures in the US economy remained persistent and likely caused prices to soar this year.
The government said consumer prices rose 6.4% in January from 12 months earlier, down from 6.5% in December. This was the seventh consecutive decline in the past year and much lower than the previous year. with level recent high of 9.1% in June. Still, it’s far above the Federal Reserve’s 2% annual inflation target.
And on a monthly basis, consumer prices rose 0.5% from December to January, well above the 0.1% increase from November to December. Gasoline, food and clothing were more expensive already. inflation in January.
The Fed has aggressively raised its key interest rate over the past year to a 15-year high in an effort to control rising inflation. The Fed’s goal is to slow borrowing and spending, cool hiring, and relieve the pressure many businesses feel to raise wages to find or keep workers. Businesses often pass on higher labor costs to their customers in the form of higher prices, thus helping to drive inflation.
So far, much of the decline in inflation reflects a freer supply chain and falling gas prices. However, the Fed’s rate hikes – eight since last March – have had no discernible impact on the US jobs market, which has remained particularly strong.
The unemployment rate has fallen to 3.4%, a 53-year low, and job opportunities remain high. The strength of the job market has helped support consumer spending, which underpins much of the US economy.
Average wages are growing at a fast rate of about 5% from a year ago. Those wage increases, spread across the economy, are likely to drive up prices in labor-intensive services. Powell often points to strong wage increases as a factor driving service prices and keeping inflation high even as other categories, like rent, are likely to fall.
Many economists expect inflation to fall to around 4% by the end of the year. But it could stabilize at that point as long as hiring and salary increases remain strong. The Fed may then feel compelled to keep borrowing rates high until 2024 or even raise them further this year.
Biden’s White House last week calculated a gauge of wages in services excluding housing – the economic sector that Powell and the Fed are monitoring most closely. The administration’s Council of Economic Advisers concluded that wages in those industries for workers, excluding managers, rose 8% in January last year from a year earlier but since has since slowed to a rate of about 5% annually.
That suggests services inflation could slow down soon, especially if this trend continues. Still, wage growth at that level is still too high for the Fed’s liking. Central bank officials would like to see a wage increase of around 3.5%, which they consider in line with their 2% inflation target.
A key question facing the economy this year is whether the unemployment rate must rise significantly to achieve that level of slowing wage growth. Powell and other Fed officials have said that curbing high inflation will require some “pain” for workers. A higher unemployment rate generally reduces pressure on businesses to pay higher wages and salaries.
For now, however, the job market remains very strong. Last week, Powell said the jobs data was “certainly stronger than any prediction I know of,” and suggested that if such healthy data continues, a rate hike may be necessary. more than is currently expected.
Other Fed officials, speaking last week, underscored their belief that there will be more rate hikes. The Fed is expected to have two more quarter rate hikes, at its meetings in March and May. Those increases will lift its benchmark rate to somewhere between 5% and 5, 25%, the highest level in 15 years.
The Fed raised the base rate by a quarter point at its most recent meeting on February 1, after making a half point increase in December and four previous 3/4 point increases.
Financial markets envision two more rate hikes this year and don’t expect the Fed to reverse course and cut rates until around 2024. For now, those expectations have ended the stalemate. between the Fed and Wall Street investors, who had previously bet that the Fed would be forced to cut rates in 2023 as inflation fell faster than expected and the economy weakened.
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