By one measure, the US economy is already close to ending the price inflation that has plagued it for most of the past two years.
Forecasts called for 12-month consumer price increases to taper from 4% in May to 3.1% in June, nearly a percentage point above the Federal Reserve’s 2% inflation target.
But the rest of the story for much of the economy — that is, the “core” inflation figure that reflects everything except food and energy prices — could be harder for consumers to bear, according to Riccardo Trezzi, professor at the University of Geneva and founder of a consultancy that focuses on core inflation.
“If you want to hit a [2% core inflation] target, unfortunately I suspect an increase in unemployment will be necessary,” Trezzi said.
The unemployment rate in the US plummeted sharply from a peak of 5.9% in June 2021 until the end of that year. Since then, it has averaged around 3.5%, rising to 3.6% last month. But the Federal Reserve keep believing the unemployment rate will increase to 4.5% until 2024.
The reason the job market has proven so resilient is that the US government and the Federal Reserve took extreme measures to support the economy during the covid-19 pandemic, and the momentum of those measures continues to be felt. Trezzi said.
The Fed has tried to reverse that momentum by raising interest rates, slowing demand and investment by making goods and services more expensive. However, these interest rate hikes take time to be fully reflected in the broader economy.
Trezzi compared the situation to trying to turn an ocean liner around.
“You hit the brake, but nothing really happens for a certain number of quarters,” he said. “That’s where we are.”
A “soft landing” (reducing inflation without significant job losses) has already been achieved, Trezzi said, given that the 9% inflation rate the United States saw in June 2022 is now a distant memory.
It’s still too early to celebrate
Troubled waters are still likely, Trezzi said, as the 12-month core inflation rate has been stuck above 5% after decades of averaging just 3.6%.
“I’m skeptical that it can be done without taxing the labor market,” Trezzi said of knocking that core inflation figure down.
Others who share this view include former Treasury Secretary Larry Summers, who has accused the Federal Reserve of underestimating inflation over the past two years and said it will require raising interest rates much more aggressively to fully control inflation.
“They were surprised by what happened with inflation, and because they’re surprised by what’s happening with inflation and the strength of the economy, they’ll be surprised by what they have to do with interest rates.” Summers tweeted.
Not everyone agrees with this bleaker outlook. Talking to CNBC in FridayAustan Goolsbee, president of the Chicago Federal Reserve, suggested that the economy may be on a rare “golden path” to achieve lower inflation rates without a recession.
“The primary objective of the Fed at this time is to reduce inflation. We are going to succeed in that and to do it without a recession would be a triumph,” Goolsbee said in a “squawk in the street” interview. “That’s the golden path, and I feel like we’re on that golden path. So I hope we keep putting off the recession forever.”
If one takes a closer look at what has really been driving the higher inflation data, there are two main culprits: used car prices and airfare prices, according to Omair Sharif, founder and chairman of the inflation firm. research and analysis Inflation Insights.
Due to supply chain problems, and to a lesser extent labor costs, prices in the auto market have skyrocketed but are now showing signs of stabilizing, Sharif said.
The same is true of air fares, where jet fuel costs have fallen dramatically and airlines have now launched larger planes and more frequent flights on popular routes to handle growing demand.
“I don’t think I have to suffer,” Sharif said, referring to winning the fight against inflation. While hitting a 2% inflation target may not happen until the second half of 2024, “if you look at what’s driving inflation, most of it is always in transportation services” like cars and planes, he said. he.
More than two years after the current bout of inflation, the debate about its causes and potential duration continues, as do questions about how long it will take for monetary policy to control it.
“Neither consumers nor the Federal Reserve are popping the champagne yet,” Mark Hamrick, a senior economic analyst at Bankrate, said in a note Monday, adding: “Americans are past the worst of inflation, but the war is still It has not finished. cattle.”
