While the Federal Reserve is getting closer to its goal for inflation, high prices for goods and services continue to affect consumers and businesses. Recent reports show that inflation is approaching the Fed’s 2% target but remains a concern for many.
Goldman Sachs suggests that inflation numbers from the Bureau of Economic Analysis may soon be rounded down to 2%. However, inflation is complex and varies by metric, and it’s still high according to many measures.
San Francisco Fed President Mary Daly emphasized the need for caution, stating there’s no guarantee of continued progress on inflation.
Inflation is not dead
Daly recalled a conversation with a passerby who questioned her about declaring victory over inflation, to which she responded that no victory is claimed yet.
Despite some easing in inflation, high interest rates remain a puzzle. Daly argues that the recent rate cut was a move to align monetary policy with signs of a cooling labor market.
Understanding inflation requires looking at both the yearly rate and its cumulative impact over time.
As of September, CPI inflation was at 2.4%, a drop from 9.1% in June 2022. While the CPI is well-known, the Fed prefers the Personal Consumption Expenditures index, which could soon reflect a similar drop.
Inflation surged past the Fed’s target in March 2021, and policymakers initially labeled it “transitory.” However, inflation has been persistent, with significant increases in costs for essentials like food and housing.
Some inflation measures are easing, but others remain high. The Atlanta Fed’s “sticky price” inflation remains at 4%, while “flexible CPI” items, like gasoline, are experiencing price drops.
Core inflation (excluding food and energy) was at 3.3% in September, concerning for the Fed as they typically view it as a better long-term indicator.
Borrowing to pay higher prices
Many Americans have gotten used to higher prices but continue to spend. Consumer spending reached nearly $20 trillion annually in Q2 2023, although year-over-year growth lagged behind inflation rates.
Household debt has increased significantly since inflation began rising, totaling $20.2 trillion. Bad debt rates are increasing but remain below long-term averages.
Businesses also face rising credit card debt, which is nearing a decade-high. Many small firms report inflation as their top concern.
The Fed’s choice
As the Fed prepares for its November meeting, markets have reacted oddly to recent interest cuts by suggesting higher rates are ahead, not lower.
Some experts advocate for pausing further cuts to better understand the situation, warning that easing could inadvertently stoke inflation.
Daly hinted at a broader goal: a future where people can catch up despite rising costs. For her, that would signal real progress against inflation.
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