FILE PHOTO: A woman shops at a supermarket as rising inflation hits consumer prices in Los Angeles, California, United States. June 13, 2022. REUTERS/Lucy Nicholson/File
Prices rose 3.7 percent in September from a year earlier, driven by high gasoline and housing costs, as the Federal Reserve continues its fight against price increases and tries to cool the economy.
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Bureau of Labor Statistics data released Thursday morning also showed prices rose 0.4 percent from August. That annual figure showed no progress from August, when prices also rose 3.7 percent annually, underscoring how persistent inflation remains and the limited tools policymakers have to address the rising costs of inflation. gas, groceries and rent.
The Federal Reserve has made it clear that it will not let up until high inflation is removed from the economy. But central bankers face a key challenge: separating the sources of inflation that could prove more persistent from those that could disappear without requiring even higher interest rates.
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“What I’m looking at is housing because rents changed very significantly. That’s starting to show up in the data,” said Joe Brusuelas, chief economist at RSM. “Gas prices are dropping significantly every day.”
Inflation has slowed sharply since hitting 40-year highs in 2022, for several reasons. Energy prices skyrocketed after the Russian invasion of Ukraine, but have since fallen. Supply chains have overcome their obstacles, which has helped cool prices for both washing machines and waffle irons. And the Federal Reserve has moved aggressively to raise borrowing costs and slow the entire economy, specifically by reducing demand for all types of investments, including home mortgages and auto loans. The Federal Reserve’s benchmark interest rate, known as the federal funds rate, is between 5.25 and 5.5 percent, the highest level in 22 years.
05/28/2021 United States Federal Reserve (Fed) Building. ECONOMY UNITED STATES FEDERAL RESERVE
However, prices continue to rise faster than normal, especially for essentials such as rent, food and gasoline. The Federal Reserve has made clear that it will keep pressure on the economy for as long as necessary, even if that means keeping interest rates higher for longer than anticipated. Officials fear that if they ease up too soon, the remaining sources of inflation will become even more entrenched in the economy.
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Part of the challenge, however, is that rate increases are a blunt tool. They can cause banks to avoid making loans or keep mortgage rates above 7 percent, as they are now. But they can’t lower prices at the gas pump or build more homes for renters struggling to cover their budgets.
This year, the general expectation was that high rates would send the economy into a recession, as people cut spending and companies cut hiring. But month after month, a completely different picture emerges: Consumers continue to spend a lot on vacations, concerts and dining out. Businesses continue to hire, and employers added a staggering 336,000 jobs in September. Federal Reserve officials expect the economy to grow 2.1 percent this year.
The flip side, however, is that such strong growth makes the Fed’s job even more difficult. The central bank strives for stable prices and a healthy labor market. And it cannot stabilize prices until the economy cools at a more sustainable pace.
Fed officials have already made clear that if the economy continues to advance, they could be forced to do more with interest rates. Officials have signaled they could raise rates once again, by a modest quarter point, before the end of the year. But even that plan has been hampered by uncertainty in financial markets.
Government bond yields have soared, especially the 10-year Treasury, a crucial benchmark that underpins borrowing rates around the world. Some Fed officials have hinted that higher yields could contribute to another rate hike, reducing the need for the central bank to hike again when it meets Oct. 31-Nov. 31. 1. (After that, officials have one more meeting scheduled for December.)
FILE PHOTO-A person buys meat in a supermarket in Manhattan, New York, United States. August 8, 2022. REUTERS/Andrew Kelly
“If forward premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional tightening of monetary policy,” Lorie Logan, president of the Dallas Federal Reserve, said in remarks to the Association National Business Economy.
In Ohio, John Lamb already feels much calmer. The president of Cleveland Express Trucking said the end of the year is typically “the best quarter for any shipper” as retailers and warehouses stock up for the holidays. There has been a small bump, but nothing like normal years.
Meanwhile, tire costs are rising sharply. Fuel prices fluctuate and make planning for the future difficult. Customers are haggling for cheaper rates. But Lamb can’t justify those cuts at the same time he tries to offset costs elsewhere. In some cases, the best response is to wait and see how your share of the economy turns around.
“I wanted to order three new tractors for next year and now I’m waiting,” Lamb said. “Spare parts are needed, because things break down or need maintenance. But I can’t justify buying equipment now.”
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