Economy sending mixed signals

WASHINGTON — Maybe it was just too good to be true.

For a few weeks in late January and early February, the U.S. economy seemed to have reached a rare sweet spot. Inflation was steadily slowing from painful heights. And growth and hiring remained surprisingly sturdy despite ever-higher interest rates imposed by the Federal Reserve.

Perhaps, the thinking went, the Fed’s inflation fighters were managing to nail a notoriously difficult “soft landing”: A scenario in which borrowing and spending slow just enough to tame inflation without tipping the world’s biggest economy into a recession.

The financial markets roared their approval in the first six weeks of 2023, with stock prices surging on expectations that the Fed might soon pause and eventually reverse the series of aggressive rate hikes it began nearly a year ago.

Then something went wrong.

It began on Valentine’s Day. The government said its closely watched consumer price index had surged 0.5% from December to January — five times the increase from November to December.

Over the next week and a half, two more government releases told essentially the same story: The Fed’s fight to curb inflation wasn’t even close to being won.

That realization brought a related worry: If high inflation was even stickier than we thought, then the Fed would likely keep raising rates — and keep them high — longer than was assumed. Those ever-higher borrowing rates would make it more probable that a recession, with layoffs and business failures, might occur.

Fed Chair Jerome Powell was expected to warn Congress Tuesday that the central bank will have to raise interest rates even higher than it’s previously signaled if inflation keeps running hot.

Unsurprisingly, the stock market has recoiled at the prospect.

Here’s a closer look at the economy’s vital signs at a perplexing time of high interest rates, still-punishing inflation and surprisingly strong economic gains.

Inflation

Consumer inflation, not much of a problem, on average, since the early 1980s, started picking up in the spring of 2021 as the economy roared out of recession and Americans spent freely again. At first, Fed Chair Jerome Powell and some economists dismissed the resurgent price spikes as likely a temporary problem that would resolve itself once clogged supply chains had returned to normal.

But the supply bottlenecks lasted longer than expected, and so did high inflation. Worse, Russia’s invasion of Ukraine a year ago sent energy and food prices rocketing. By June 2022, consumer prices were 9.1% higher than they’d been a year earlier — the hottest year-over-year inflation in more than four decades.

By then, the Fed had begun, belatedly, to respond. It has raised its benchmark rate eight times since March 2022 in its most aggressive credit tightening since the early 1980s.

In response, consumer inflation edged down from its mid-2022 peak. It posted milder year-over-year increases for seven straight months as supply chains unclogged and higher borrowing costs worked their way through the economy, putting a brake on overspending.

Financial markets appeared ready to declare the inflation dragon all but slain.

Then came January’s unexpectedly hot consumer inflation data. Two days later, the government reported that wholesale prices had jumped 0.7% from December to January, nearly twice what forecasters had expected.

Next came bad news from the inflation gauge the Fed watches most closely: The government’s personal consumption expenditures price index. It accelerated 0.6% from December to January, far above the 0.2% November-to-December uptick. On a yearover-year basis, prices rose 5.4%, up slightly from the annual increase in December and well above the Fed’s 2% inflation target.

Some economists expect the Fed to raise its benchmark rate by a substantial half-percentage point when it next meets March 21-22, after having announced only a quarter-point hike when it met Jan. 31-Feb. 1.