A food shopper searches for vegetables July 1, 2023 at the Hannaford supermarket in South Burlington, Vermont. Robert Nickelsberg | Getty Images
Despite recent signs of cooling inflation, the battle to bring down the significant price increases of the past three years is far from over. Last week, there were reports showing that the rate of growth in consumer prices and the prices businesses pay for goods had hit multiyear lows. However, these data points only reflected relative rates of change and didn’t capture the overall surge that led to the highest inflation level in over 40 years. Additionally, there are concerning factors in the economy such as rising fuel prices and a sluggish housing market that could cause problems in the future.
Jared Bernstein, chair of the White House’s Council of Economic Advisers, emphasized that the fight against inflation is not over and cautioned against premature celebration. While the consumer price index increased by just 0.2% in June, bringing the annual rate to 3.1%, this figure is much lower than the peak of 9.1% reached a year ago. Similarly, the producer price index rose only 0.1% in June and remained the same on an annual basis.
Though these declines in inflation rates offer some optimism, there are concerns that the ideal conditions that contributed to these declines may not last. Factors such as tight labor markets, increased wages, and potential inflation risks in the housing market could lead to a resurgence of inflation in the future. The Federal Reserve has indicated that they expect their benchmark rate to rise by at least half a percentage point by the end of the year.
While the current data shows a decline in inflation, there are warning signs that need to be considered. Excluding volatile food and energy prices, core inflation rose by 0.2% in June and is tracking at a 4.8% annual rate, higher than what the Federal Reserve would prefer. Housing costs, which were expected to subside, have continued to rise, further contributing to inflationary pressures. When viewed over a longer time frame, the consumer price index is still up about 18% from three years ago.
It is important to be cautious about the direction of inflation as there are still potential risks in the economy. The impact of inflation on lower-income families, workers, and small businesses is a concern for the Federal Reserve. Small businesses have been particularly affected by rising prices and higher interest rates, which have negatively impacted their cost structure and financing options.
There are positive factors to consider, such as the easing of supply chain problems and the expectation of decreased demand as consumers spend their excess savings. These trends could influence the Federal Reserve’s decisions on interest rate hikes and provide some relief from inflation. However, it is necessary to monitor the impact of inflation on spending, as retail sales figures could indicate whether there is a potential for further inflationary pressure.
While the trajectory of inflation seems to be moving in the right direction, there is still a long way to go in addressing the negative impact it has on consumers. The fight against inflation is ongoing, and it is important to remain cautious and vigilant in managing its effects on the economy.