America still has an inflation problem

Editor’s Note (September 14, 2022): This article has been updated to include market reaction.

Mewas I was hoping that America’s latest inflation report would bring good news. 9.1% peak Economists had expected core prices, excluding food and energy, to rise modestly in August for the second month in a row by recent standards. Those hopes were dashed. The Sept. 13 release showed another drop in his headline annual rate to 8.3% in August. However, core prices were up 0.6% for the month, double the forecast of 0.3%. The news hit the market hard: S&P The 500 stock index fell 4.4% as investors worried the US Federal Reserve would have to raise interest rates more rapidly to cool the economy.

Investors focus on core inflation as energy prices fluctuate wildly. Oil prices are down a quarter from their peak in early June. Looking at the breakdown of price data for August, energy cut inflation by nearly half a percentage point month-on-month. But other components—foodgoods, especially services such as rent, pushed prices higher (see chart).

August’s core inflation rate, if sustained for the year, would be 7.4% annualized, well above the Fed’s 2% target. Investors believe that for the third time in a row the Fed will raise rates by three-quarters of a percentage point at its meeting later this month, making it the most aggressive pace of tightening in four decades. They may go further and raise interest rates by 1 percentage point.

One of the key factors explaining the persistence of high core inflation is: tight labor marketThere are about two jobs for every unemployed person in America, and workers have strong bargaining power, which is reflected in significant wage increases. A tracker issued by the Fed’s Atlanta branch showed wages rose at a pace of nearly 7% annually in August. The grim conclusion for many economists is that the US may need a significant increase in unemployment to ease wage pressures and ultimately inflation.

The median projection of members of the Federal Reserve’s rate-setting committee is that the unemployment rate will only need to rise slightly to 4.1% in 2024 from its current level of 3.7%. However, a recent paper by Lawrence Ball of Johns Hopkins University and Daniel Lee and Prachi Mishra of Johns Hopkins University states: imf The 4.1% unemployment rate is said to be consistent with core inflation of 2.7% to 8.8% in 2024. In other words, only in the most optimistic scenario does it look like America can escape the morass of inflation without many people losing their jobs. .

Nonetheless, the divergence between core and headline inflation raises an interesting question. As far as consumers are concerned, there is no such distinction. All prices matter, and in fact, the price of a gas pump helps get Americans’ attention more than prices elsewhere. Consumer expectations for future inflation have fallen sharply since June, no doubt thanks to lower oil prices, according to consumer surveys.

As Ball and his co-authors argue, the failure to account for the pass-through from high energy prices to core inflation is one reason economists have misjudged inflationary pressures over the past year. did. The current expectation is that energy prices may continue to fall and a pass-through to weak core inflation will again frustrate many economists. But so far, America’s inflation problem shows little sign of resolution. America still has an inflation problem

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