Economy

Will the good American news on inflation last?

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Prices have risen rapidly in 2021 and 2022, straining U.S. household budgets and eroding President Biden’s approval rating. But inflation slowed in late 2023, a burst of progress that occurred more quickly than economists expected and fueled hopes of a soft economic landing.

The question now is whether the good news can persist until 2024.

As forecasters try to guess what will happen next, many are looking closely at the origins of the recent downturn. The details suggest that a combination of lower prices for goods – such as clothing and used cars – and moderation in the costs of services, notably travel, has helped blunt the downturn, even as rent increases put pressure on time to fade.

Taken together, these trends suggest that more disinflation may be ahead, but they also suggest that some lingering risks loom. Below is an overview of the big changes to watch out for.

What’s happening now in the United States is what economists call “disinflation”: when you compare today’s prices with those of a year ago, the pace of growth has slowed considerably. . At their peak in the summer of 2022, consumer prices were increasing at an annual rate of 9.1%. In November, that figure was just 3.1 percent.

However, disinflation does not mean that prices simply fall. Price levels have generally not reversed the sharp rise that occurred just after the pandemic. This means things like to rent out, car repair And grocery stores remain more expensive on paper than they were in 2019. (Wages have also climbed, and have risen faster than prices in recent months.) In short, prices continue to rise, but not as fast.

The Federal Reserve, charged with trying to restore price stability, wants to bring price increases back to a slow and steady pace, consistent with a sustainable economy over time. Like other central banks around the world, the Fed defines this as an annual inflation rate of 2%.

Inflation shocked economists in 2021 and 2022 by first rising sharply and then remaining high. But starting in mid-2023, it started moving in the opposite direction, falling faster than expected.

Ace from mid last year, Fed those responsible are expected a key measure of inflation – the measure of personal consumption expenditures – to end the year at 3.2 percent. According to the latest data released in November, this has instead, it collapsed at a more modest rate of 2.6 percent. The more current measure of the consumer price index has also fallen rapidly.

The surprisingly rapid slowdown began when travel prices began to slow, said Omair Sharif, founder of Inflation Insights. When it came to airfares in particular, the issue was supply.

Demand was still strong, but after years of limited capacity, available flights and seats had finally caught up. That, combined with cheaper jet fuel, brought prices down. And while prices for other travel-related services, like hotel room rates, rose quickly in 2022, they rose much more slowly in mid-2023.

The next change that brought down inflation came from goods prices. After jumping two years, the prices of products like furniture, clothes and used cars began to climb much more slowly – or even fall.

The extent of disinflation coming from goods is surprising, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. And, encouragingly, “it was a reasonably broad approach.”

The relief from inflation came in part from improved supply. For years, congested transit routes, high shipping rates and limited numbers of workers limited the number of products and services companies could offer. But late last year, shipping routes were functioning normallypilots and flight crews were in the sky, and car manufacturers were produce new vehicles.

“Supply is at work,” said Skanda Amarnath, executive director of the worker-focused research group Employ America.

In fact, one long-awaited source of disinflation has yet to fully manifest: a slowdown in rent inflation.

Private sector data on new rents skyrocketed at the start of the pandemic, but then slowed sharply. Many economists believe this decline will eventually feed into official inflation data as tenants renew their leases or take out new ones – but the process takes time.

“We will likely see more rent moderation,” said Laura Rosner-Warburton, senior economist and founding partner of MacroPolicy Perspectives.

Given that a further slowdown in rents remains possible and the rise in goods prices could continue to slow, many economists expect overall consumer price inflation to move closer to the target of the Fed by the end of 2024. There is even a risk that it will fall below 2%, some think. .

“It’s a scenario that deserves some discussion,” Ms Rosner-Warburton said. “I don’t think it’s the most likely scenario, but the risks are more balanced.”

Of course, that doesn’t mean Fed officials and the U.S. economy are completely out of the woods. Fall in gas prices have helped bring down inflation both overall and by fueling other prices, such as airfares. But fuel prices are notoriously volatile. If unrest in gas-producing regions leads to an unexpected rise in energy costs, it will become more difficult to curb inflation.

Geopolitics also carries another risk of inflation: attacks on merchant ships in the Red Sea, for example, disrupt a vital transit route for global trade. If these problems persist and worsen, they could eventually lead to higher property prices.

And perhaps the most immediate risk is that the sharp slowdown in inflation towards the end of 2023 may have been overestimated. In recent years, year-end price figures have been revised and January’s inflation data is mostly positive, in part because some companies are raising prices at the start of the new year.

“There is a lot of turbulence ahead,” Mr. Sharif said. He said he would closely monitor a series of inflation recalculations scheduled for release. February 9which should allow policymakers to more clearly determine whether the recent slowdown has been as notable as it appears.

But Mr Sharif said the takeaway was that inflation looked set to continue its moderation.

That could help pave the way for lower interest rates from the Fed, which projects it could cut borrowing costs several times in 2024 after raising them to their highest level in over of 22 years in order to calm the economy and fight against inflation. under control.

“There’s not much upside risk left, in my view,” Mr. Sharif said.