Home BusinessEconomy New Inflation Developments Are Rattling Markets and Economists. Here’s Why.

New Inflation Developments Are Rattling Markets and Economists. Here’s Why.

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When inflation began to accelerate in 2021, price pressure was clearly pandemic-related. Amid the chaos in his supply chain, companies have been unable to produce cars, sofas and computer games fast enough to keep up with demand from consumers at home.

Russia’s war in Ukraine has exacerbated price pressures this year, with fuel and food prices skyrocketing.

But now that these inflation drivers are showing early signs of waning, the question is how much will overall inflation ease? And the answer may depend to some extent on what is happening in one key area: the labor market.

The Federal Reserve is lasering on job growth and wage growth as it sharply raises interest rates to keep the economy in check and curb rapid inflation. Officials believe they will have to take some of the momentum out of the economy to bring inflation down to the 2% target, the worst in 40 years.

The way it does that is by slowing spending, employment and wage growth, and it does so by raising borrowing costs. So far, a marked recession has been elusive, with economists and investors suggesting that central banks may need to act more aggressively to keep growth down and inflation down. doing.

As this week’s data showed, prices continue to soar. And while the job market has eased somewhat, employers still have solid hiring, raise wages at the fastest pace in decades. This continued progress will allow consumers to keep spending and may give employers the strength and incentive to raise prices to cover rising labor costs.

Economists say the risk of the US facing a rough landing increases as inflationary pressures mount and the Fed cracks down on the economy.

Krishna Guha, head of Evercore ISI’s global policy and central bank strategy team, said it was increasingly likely that “without a proper recession and rising unemployment, we will not be able to keep inflation out of this economy.” rice field. The Federal Reserve expects inflation to be contained without triggering a full recession.

The challenge for the Fed is that inflation increasingly appears to be driven by long-term factors tied to the underlying economy, rather than temporary factors caused by the pandemic or the war in Ukraine. It is increasing.

The August CPI data released on Tuesday made that point. Gas prices plunged last month, and many economists had expected it to bring down overall inflation. They also believed that recent improvements in supply chains would moderate commodity price increases. The cost of used cars, a major contributor to last year’s inflation, is now falling.

However, despite these positive developments, the rapidly rising costs of a wide range of products and services have led to higher monthly prices. Everything is skyrocketing: rent, furniture, restaurant meals, and dental visits. Inflation on an annual basis he rose 8.3%, up 0.1% from the previous month.

The data highlights that even without unusual disruptions, costs are likely to continue to rise as so many products and services have increased in price.Core inflation rate excluding food and fuel costs to capture underlying price dynamics Re-acceleration to 6.3% In August after easing to 5.9% in July.

“There’s a very big underlying factor to inflation right now, rooted in an overheating labor market,” said Jason Furman, an economist at Harvard University. There could be more inflation because of it, or less inflation because of luck, like gas going down.”

He estimated that core inflation would continue to rise at around 4.5%, even if the pandemic and war-related turmoil stopped prices rising.

So far, war- and supply-chain disruption-induced inflation hasn’t quite lagged behind the United States.Supply chain began to loosenand commodity prices for oil and some grains have fallen after soaring amid Russia’s invasion of Ukraine.

This could pave the way for a consistent slowdown in consumer price inflation, shifting the focus to how much and how quickly inflation will fall. The answers to these questions rest on fundamentals.

“The bigger question for the Fed is not whether inflation has peaked. She estimates that it will be difficult to keep inflation below 4% (about double the Fed’s average target of 2%) without a significant slowdown in the economy and labor market.

“The housing and labor markets are still there, and the inflationary pressures emanating from those two areas are still strong and very unbalanced,” Markowska said.

So the Fed, which meets next week, is scrambling to rebalance supply and demand.

The central bank has raised interest rates from near zero in March to a range of 2.25-2.5% at its last meeting and is widely expected to raise rates by at least another three-quarters of a percentage point next week. The Fed’s move constitutes the fastest rate hike campaign since the 1980s. The goal is to make it expensive to borrow money. This could theoretically lower prices as consumer spending cools, supply catches up and businesses compete for customers.

Following Tuesday’s worrying inflation data, investors have begun to speculate that the Fed may hike rates by another big full-point next week, or push higher-than-usual interest rates to tighten the economy. rice field.

Economic growth has slowed, but so far has proven to be quite resistant to Fed rate changes. Consumption is on the decline, but it’s not tanking. Last month, the employer hired 315,000 of him. wage measures While not enough to keep up with inflation, it still shows that salaries are rising unusually quickly.

The combination of more jobs and better wages is likely to help strengthen households already supported by pandemic savings, giving families the ability to continue spending and the means to keep up with higher housing costs. At the same time, rising labor costs may cause some companies to raise prices to protect their profit margins.

“Inflation looks stickier and broader,” PIMCO economist Alison Boxer said after Tuesday’s report. “There is reason to worry that wages are shifting to a bigger issue.”

Even before this week’s inflation data, Fed officials warned that used car prices were falling, gasoline prices were stable, and more contained Consumer inflation expectations.

Fed Chairman Jerome H. Powell said last week, “It is precisely our view, and my view, that we need to act frankly and forcefully now, as we have done. There is,” he said. “We have to keep doing it until the job is done.”

An initial slowdown in the economy will take time to be reflected in corporate pricing behavior, and underlying inflation may begin to weaken, as the authorities had hoped.

But if the Fed decides the economy needs to be more constrained in the coming months to meet its goals, investors should guess more and moreit can be costly.

Central banks want to slow the economy enough to reduce job opportunities without hurting the economy enough to cause unemployment to skyrocket.Some economists still think it is possiblegiven how extraordinary the current labor market situation is.

But a faster and more dramatic series of rate hikes would increase the likelihood of a sharp downturn in growth that would push up unemployment.

America will get a glimpse of the Fed’s assessment of what it takes next week when the central bank releases both its interest rate decision and a new set of economic forecasts.

their economic forecast In June, officials expected interest rates to peak at 3.8% next year and the unemployment rate to rise only marginally from current levels. 3.7%Economists are increasingly predicting that both interest rates and unemployment forecasts could soar.

“The most likely scenario is that inflation will not come down unless unemployment goes up,” Furman said. “It is possible that the labor market will cool without increasing unemployment, but it has never happened before.”

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