Even though the Federal Reserve is getting closer to its inflation goal, high prices still affect everyone in the U.S. economy.
Recent reports show that inflation may approach the Fed’s 2% target, but it’s still a complex issue with prices remaining high for many.
Inflation is not dead
Mary Daly, San Francisco Fed President, recently emphasized that while inflation pressures are easing, the Fed isn’t declaring victory. She shared how a local resident questioned her about the Fed’s success with inflation, indicating that the public remains uncertain.
This raises a question: If inflation is decreasing, why are interest rates still high? Daly explained that the Fed’s recent rate cut aimed to better align policy with the changing economic landscape.
It’s important to differentiate between the overall inflation rate and its lasting effects. The public focuses on the headline inflation number, which presents only part of the picture.
Borrowing to pay higher prices
Despite rising inflation, Americans continue to spend significantly. Retail sales saw a healthy increase recently, but overall spending growth fell short of inflation rates.
Consumer debt has surged since the inflation spike started, rising 19%. Although this debt hasn’t caused major issues yet, there are signs of rising delinquency rates and worries about making future payments.
The Fed’s choice
The Fed faces important decisions at its upcoming policy meeting. Interestingly, after a recent rate cut, markets reacted by suggesting higher future rates instead of lower ones.
Some analysts, like those from SMBC Nikko Securities, argue that the Fed should pause rate cuts until there’s more clarity on inflation trends. There’s a concern that easing financial conditions could result in rising inflation again.
Daly concluded that her view of victory involves creating an environment where people feel more secure financially and can get ahead, emphasizing the need for ongoing vigilance.
