Economy: A bump in inflation upends forecasts
“Sticky” inflation is forcing tough questions at the Federal Reserve, said Howard Schneider in Reuters. For the most part, America’s “economic engine keeps motoring above its potential.” The inflation numbers released last week, which saw consumer prices ticking up at an annual rate of 3.5 percent, are the unwelcome side effect. Inflation that’s still “well above” the Fed’s 2 percent target is the lingering thorn in the side for the Fed and the Biden administration, and the highest interest rates in a quarter century haven’t quelled it. Economists are still hopeful that there is a “golden path” of both strong growth and falling inflation. This week, though, Fed chairman Jerome Powell noted the “lack of progress” on inflation. If that doesn’t change, the Fed could even “resort to rate hikes it had all but taken off the table.”
“It’s too early” to say that the Fed should abandon rate cuts, said Jonathan Levin in Bloomberg. The biggest factor in inflation rising from 3.2 percent in February to 3.5 percent in March was a jump in auto insurance rates. This “reflects the surge in used-car and parts prices from 2021 and 2022,” and insurers are just now pushing through premium increases. Without that, inflation would have come in right where it was expected. Still, three consecutive months of above-estimated inflation “is more than a blip,” said The Wall Street Journal in an editorial. Steady increases in rent and gas prices each month “are costs that consumers feel acutely.” And “the return of the inflation thief” comes as workers have only just begun to see wages outpace inflation.
“Even a cooling inflation rate simply means that prices are growing more slowly,” said Michael Powell in The Atlantic. And that’s after they grew a lot. The price of food went up 25 percent between 2019 and 2023. Gas and fuel-oil prices have gone up about 50 percent. These things matter for lower-income and working-class Americans, who “experience a different reality” than “Democratic Party analysts and left-leaning economists.” The last American president faced with “a similar jump in prices was Jimmy Carter,” said Matthew Continetti in National Review. This is what Donald Trump is “talking about when he asked Americans if they were better off than they were four years ago.” A cart of groceries that cost $100 under Trump now costs about $120. Biden can still “overcome the challenge if Republicans fail to persuade voters that their policies will stabilize prices and wages.”
Nobody seems able to predict inflation with any accuracy, said Peter Coy in The New York Times. “We were surprised when inflation rose. We were surprised when inflation fell.” We can’t trust academic theories about inflation because they “tend to depend on the estimation of numbers that can’t be directly observed, such as how fast the economy can grow.” Fed rate-setters, on the other hand, typically “fall back on things they can observe, such as price changes in various categories.” The problem is that this data is backward-looking. And all the analysts are embarrassingly unable to tell us “where inflation is going, not just where it’s been.”