The latest inflation report on Wednesday from the Bureau of Labor Statistics is expected to show that price increases for goods and services are slowing.
Unfortunately, that won’t be much comfort to consumers, who can still expect to feel the pinch in their pockets for a while longer.
The BLS reported last month that the consumer price index had risen 6% year-on-year in February, down from the 9% high last June, but still well above the Federal Reserve’s 2% target.
Because inflation numbers are closely tied to decisions by the Federal Reserve about how high interest rates should be, most investors they are betting The Fed will raise rates again by 0.25% at its next meeting on May 3.
Analysts say some of the key drivers of the post-pandemic rise in inflation, such as supply chain problems and high food and energy prices caused in part by the war in Ukraine, are abating. However, the flames of inflation are being fanned by a still active labor market, which has added 1 million jobs in 2023.
It’s an unfortunate trade-off: Workers who feel secure in their jobs feel comfortable spending, creating demand in the economy that can drive price surges.
By raising interest rates, the Federal Reserve hopes to make investing, borrowing, and ultimately hiring more expensive for businesses.
«There is an imbalance between supply and demand,» said Greg McBride, a senior vice president and chief financial analyst at Bankrate. «Now, that imbalance is still stemming from an inordinate level of demand. Unemployment is at its lowest in 50 years, and spending is pretty strong, and it’s that demand that the Fed intends to address by raising interest rates.» .
In a recent note to clients, Seema Shah, chief global strategist at Principal Asset Management, said US inflation is expected to slow further this year, «but only very slowly.»
«Slower economic activity and a more flexible labor market,» which is likely to mean an unemployment rate higher than the current 3.5%, «will be needed to ease these pressures,» Shah said.
Food and rent are among the categories that continue to see the biggest price increases. In February, food prices rose 10%, continuing a streak of 12-month double-digit increases dating back to May.
the same month, rents had their highest increase in a month on record, rising 8.2%. Rental data is considered a «delay indicatorwhich means that surveys are slower to capture changes in real time because most leases have a minimum length of 12 months. Other data from Realtor.com shows that rental growth peaked around the winter of 2021-22.
In fact, prices are cooling substantially in other areas of the economy. While gasoline prices have risen more than 13 cents in the past month to $3.61 a gallon, they are still below $4 levels a year ago.
Wage growth is slowing
Meanwhile, wage growth has started to show significant declines after it experienced ups and downs during the coronavirus pandemic. According to data released by Goldman Sachs, worker earnings are growing at less than 5% per quarter, up from 8% in 2021. And wage growth for lower-paid workers, represented by leisure and hospitality jobs, it has dropped to less than 6% after rising to around 18% in the winter of 2021-22.
“We believe that the slowdown in wage growth coupled with a further decline in the unemployment rate supports our long-standing view that much of the wage spike was driven by temporary factors,” mostly employment-related causes. the pandemic, like stimulus checks, reduced workforce. increases in energy supply and prices that led workers to demand higher wages, Goldman Sachs economist David Mericle wrote in a note to clients Friday.
“All of these have fully or partially faded on their own and appear to have solved much of the problem of slowing wage growth to the 3.5% pace that we estimate would be consistent with 2% inflation,” Mericle continued.
As a result, he said, there is less urgency for the Fed to continue aggressively raising interest rates.
But Bankrate’s McBride said that even if inflation continues to slow, it won’t reverse completely. Only on rare occasions, and not even during some recessions, Do the prices go down every year?.
The bottom line: The higher prices that have become a hallmark of the post-pandemic American economy are here to stay.
«The expected moderation in inflation doesn’t mean prices will fall. It just means they won’t go up as fast,» McBride said.
«The inflation that we’ve seen in the last two years has increased household spending and essentially set a new base, and those expenses are not going to fall across the board. They may not go up as fast.»