Business is booming.

Some Silver Linings On Inflation

People rightfully worry about inflation since they get to keep less of their paycheck, but there are some, though not universal, positive signs on inflation in the most recent data. In sum, we are already heading in the right direction towards less inflation. But, Congress and the administration need to keep their eye on improving the supply of goods and services, congressional Republicans need to avoid additional risks to the economy by gambling with the government’s ability to pay its bills, and the Federal Reserve will need to protect the strong labor market by moving cautiously on interest rates.

Let’s start with the elephant in the room. Inflation in January unexpectedly increased by 0.5%. Ignoring the highly volatile food and energy prices, inflation still increased by 0.4% last month. That certainly puts a damper on any rosy economic scenario.

But, one month does not make a trend. Annual inflation still continued to fall. Prices in January 2023 were 6.4% higher than in January 2022. This was the lowest year-over-year increase since October 2021. Annual inflation has now fallen for seven months in a row. Inflation based on the less volatile price index without food and energy prices has declined for four months in a row to its lowest level in a year. Monthly fluctuations can happen and should not be too worrisome if the overall trend is in the right direction. The questions going forward then are whether this trend will continue, and more importantly, how fast inflation will come down.

The future outlook also suggests that inflation could moderate. Price increases for renters and homeowners played a key role in the faster-than-expected inflation in January 2023. Yet, rental inflation has fallen now for two months in the row, although it remains stubbornly high. There are indications that the rents charged in new contracts are falling, albeit from rather high levels. As those new rental contracts set the tone for overall rental prices, there is a chance that rental price increases will continue to come down over the coming months and reduce overall inflation, too.

At the same time, inflation for other key items have moderated, too. Inflation for food in grocery stores, bakeries, among other places, has now fallen for five months in a row, although it still remains high. Moreover, prices for health care are only 3.1% higher than a year ago as health care inflation has fallen sharply for four months in a row. And, inflation in key transportation areas such as new and used cars as well as transit have all moderated over the past year or so. In fact, prices for used and new cars were 0.9% lower in January 2023 than a year earlier in a reversal of the sharp run up of car prices associated with a global chip shortage in 2021. The data also show inflation falling in recent months for furniture, appliances, and apparel. There is even some good news in the volatile energy area as prices for heating fuel and electricity fell in January, likely because of an unseasonably warm winter. While high prices for many necessary items such as food and energy hurt households, the recent trends are encouraging.

Importantly, the decline in inflation in the past few months has happened faster than the decline in wage growth. Inflation adjusted hourly earnings are up by an annualized 1.1% over the past three months, from October 2022 to January 2023. In comparison, inflation adjusted hourly earnings were down by 0.4% in the prior three months and down by 3.6% in the three months before then. Moreover, wages for people working in retail, nursing homes, childcare services and restaurants continue grow at above average rates. For instance, the annualized hourly wage growth for people working in restaurants was 6.4% in the past three months of 2022 – no data are available for January 2023 yet. At the same time, overall inflation-adjusted hourly wages grew by an annualized rate of 1.5% during that time. Further, the return to positive inflation-adjusted overall wage growth looks even better when looking at weekly earnings growth since the hiring boom has continued amid higher interest rates and slowing inflation. People not only get higher pay, they also work more hours, boosting their overall pay. Inflation-adjusted weekly earnings grew at an annualized rate of 2.3% in the past three months – their highest growth rate since the three-month period that ended in January 2021. In the recent months, the economy seems to be moving towards a sustainable balance, albeit a delicate one, that once again delivers for workers, especially for many in lower-paid industries.

These trends are welcome news as wage growth has lagged behind inflation for some time. Inflation adjusted hourly earnings were still 1.8% lower in January 2023 than in January 2022. This is substantially less than the 3.2% drop from June 2021 to June 2022, but it still means that a large number of people have a harder time paying their bills than in the past. Importantly, workers will see a return to growing paychecks if the strong labor market continues while inflation subsides.

There is no doubt that accelerated or even high inflation is undesirable. People get to keep less of their paycheck and there is the heightened risk that things could go out of control – inflation accelerating even further – if people and businesses believe that prices will continue to grow ever faster. Luckily, that’s not where we are. Inflation has slowed and there are indications that it will continue to fall.

These data then hold several important lessons. First, Congress and the administration need to continue to invest in the supply side of the economy. This means unclogging supply chains in manufacturing, increasing the supply of affordable housing, to name some of the key sectors. This will reduce longer term inflationary pressures and make it easier for people to pay their bills. Second, Congress and the administration need to continue to lower prices for key items such as prescription drugs for American families. Paying for many items is often difficult for people not necessarily because prices have risen drastically, but because those goods and services are too expensive for people to afford. And third, congressional Republicans will need to stop playing games with the fiscal health of the United States and reduce risks to the recovery. This will require a clean increase in the debt ceiling sooner rather than later to prevent avoidable harm to the economy and people’s financial security. Finally, the Federal Reserve will need to tread cautiously in slowing the economy so as not to jeopardize meaningful income gains from a strong labor market. It is hard to predict whether the economy will remain in a stable situation that delivers for working families. But, policymakers can increase the chances that it will.

Source link

Comments are closed, but trackbacks and pingbacks are open.