The Fed raising interest rates could lead the economy to a recession
Georgetown Professor Nada Eissa explains why she believes the Fed’s actions to get inflation under control will likely lead to a recession.
Andrea Kramar and Yasmeen Qureshi, USA TODAY
Americans felt a bit more relief in April as inflation slowed for a tenth straight month, helped by a slowdown in prices at the supermarket.
Consumer prices increased 4.9% from a year earlier, down from 5% in March and a 40-year high of 9.1% last June, according to the Labor Department’s consumer price index. That’s the smallest yearly increase since April 2021. On a monthly basis, prices rose 0.4% following a 0.1% increase in March.
For shoppers and drivers, Wednesday’s inflation report was mixed. Gasoline prices jumped 3% just in April. By contrast, grocery prices dropped for a second straight month. Used car prices surged 4.4% after nine months of declines. Rental costs rose but at a slower pace.
Still, the data offered some signs that inflation is continuing to cool. Airline fares dropped 2.6% in April, and hotel prices plunged 3% after four straight monthly increases.
“It’s sticky and bumpy, but make no mistake, inflation is cooling,” said Gregory Daco, Chief Economist at EY-Parthenon.
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What is the difference between core CPI and CPI?
Core prices, which exclude volatile food and energy items and capture longer-lasting trends, increased 0.4% from March following a similar rise the previous month. That lowered the annual increase from 5.6% to 5.5%.
The report revealed that the nation’s road back to normal inflation levels will be uneven. Prices overall continued to post a strong increase from the previous month. Although inflation for goods has been easing as COVID-related supply chain bottlenecks wind down, some items rose last month. Apparel prices increased and used cars jumped after nine straight declines.
And while services prices are poised to pick up as Americans resume traveling and dining out more frequently, several of those cost increases slowed in April.
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Will the Fed continue to raise rates?
Although inflation has edged down just gradually, the Federal Reserve last week signaled it now will likely pause its aggressive campaign that has hiked a key interest rate by 5 points over the past 14 months. Fed officials have said the collapse of Silicon Valley Bank and two other banks will probably toughen lending standards and dampen the economy and inflation, leaving less work for the central bank to do.
Economist Andrew Hunter of Capital Economics says the CPI report keeps the Fed on track to halt its rate hikes but shows that persistently high could prevent Fed officials from cutting rates to combat a weakening economy for a longer period.
What is the future of gas prices?
While gas prices increased in April they are down 12.2% from a year ago. In recent weeks, pump prices have fallen again. Nationally, regular unleaded gasoline averaged $3.53 a gallon Tuesday, down from $3.60 a month ago.
Are grocery prices going to go down?
Grocery prices edged down 0.2%, the second straight monthly drop, and the yearly rise eased to 7.1% from 8.4%. The cost of commodities such as wheat and corn has fallen in recent months because of easing global demand.
In April, the price of eggs dropped by 1.5%, the third straight monthly decline, after a string of sharp bird flu-related increases but costs are still up 21.4% over the past year. Pork prices fell 1.2%; fish and seafood costs dipped 0.7%; and bread was down 0.3%.
But some costs continued to climb. Chicken prices increased 0.5% and uncooked ground beef, 0.6%.
Restaurant prices increased by 0.4% and are up 8.6% annually.
Is rent causing inflation?
Rent again was the chief driver of inflation but the increase continued to moderate. Rent picked up 0.6%, up from 0.5% in March but down from a string of stronger gains. Annually, the increase was unchanged 8.8%. Economists expect rents to fall, based on new leases, but that shift has been slow to filter through to existing leases.
Used car prices leaped 4.4% after as a flurry of wholesale cost increases finally showed up in retail prices but they’re still down 6.6% yearly. Prices had been tumbling after a pandemic-related run-up that pushed up costs by about a third. And apparel prices increased 0.3%.
Some goods prices softened as supply-chain snarls continued to improve. New car prices fell 0.2%. Furniture and bedding costs were down 0.5% and appliance prices declined 1.9%.
Meanwhile, some services became a bit less pricey despite Americans’ return to pre-COVID travel and other activities. Airline fares fell 2.6% and hotel rates slid 3%. And medical care services dipped 0.1% after a 0.5% decline the previous month.
Inflation winners and losers
The ten consecutive rate hikes by the Federal Reserve have made it more expensive to borrow, whether you’re buying an appliance with a credit card or getting a car loan.
The annual percentage rate on a new credit card has jumped from slightly above 16% to almost 24%. Meanwhile, in the past year, Freddie Mac’s 30-year mortgage rates have increased from 3.6% to 6.4%. That means if you made a $90,000 down payment and obtained a $450,000 mortgage, your monthly payment would spike by 31%, or roughly $615, according to a Bankrate calculator.
In the wake of the Fed’s latest key interest rate hike of a quarter percentage point, economists caution we have yet to see the full impact since rate hikes can take a year to ripple through the economy.
Mortgage rates
Though a lack of homes for sale and a still robust jobs market is keeping home prices high, costs dipped slightly year-over-year in February and March.
Rates may decline further before the end of the year if consumer prices continue to slip, convincing the Federal Reserve to pull back on interest rate hikes and making the marketplace more enticing to home buyers and sellers.
“Mortgage rates are likely to descend lower later in the year as the consumer price inflation calms down and changes the thinking of the Fed from tightening to possibly loosening the monetary policy,’’ says National Association of Realtors’ chief economist Lawrence Yun.
Mortgage rates have more than doubled since the Federal Reserve began hiking interest rates over a year ago to dampen inflation. But the latest rate increase of a quarter percentage point should not impact mortgage rates because the boost was expected, says Taylor Marr, Redfin Deputy Chief Economist.
Home sales have fallen from a seasonally adjusted yearly rate of 6.5 million in January 2022 to 4.44 million in March 2023.
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Core Consumer Price Index
The core consumer price index is a measure of how consumer prices shift, not counting the costs of energy and food which are typically the most volatile components of the broader consumer price index. Economists expect the core consumer price index for April to show prices rose 0.3% over March, and 5.4%, year over year.
When did the Fed start raising interest rates?
The Fed raised its key short term interest rate a quarter of a percentage point last week – its tenth rate hike in a row. But it signaled that it may pause further boosts as it waits to see if its string of rate increases, and the tighter lending standards imposed after the failure of Silicon Valley Bank, do their part to tame inflation.
Fed inflation report
The Personal Consumption Expenditure price index, the Federal Reserve’s preferred measure of inflation, comes out on May 26.
The next consumer price index report is scheduled to be released on June 13.
What is a good inflation rate?
The Federal Reserve’s target is an inflation rate of 2%. It has said that the 2% goal “is most consistent with the Federal Reserve’s mandate for maximum employment and price stability.”
What is the stock market doing today?
Stock markets were lower in the early afternoon after investors saw that inflation was making strides toward easing, even if it remained too high. The S&P 500 was 0.3% lower after giving up most of an earlier gain. The Dow Jones Industrial Average was down by 292 points, or 0.9%, at 33,271 as of 1:47 p.m. Eastern time, and the Nasdaq composite was 0.2% higher.
10-year treasury
Bond prices climbed after the highly anticipated report said inflation at the consumer level edged down to 4.9% last month, its lowest level in two years.
Inflation rate
In March, the inflation rate was 5% on an annual basis. The pace of price increases slowed for the ninth month in a row as prices at the pump and the grocery store declined.
Reuters reported last week that fears of stagflation were percolating on Wall Street ahead of today’s inflation report. Investors hoped the CPI data would indicate whether the Federal Reserve was succeeding in curbing inflation without damaging growth.
Stagflation happens when economic growth is sluggish while inflation is high. The term lacks a formal definition or specific threshold, but elements include high unemployment and a weakened economy as prices climb.
One factor that can help cause stagflation is a spike in the cost of raw materials, causing inflation and leaving people with less money to spend.
While far from assured, Reuters reported, the scenario has loomed large in investors’ minds as last year’s inflation surge forced the Fed to launch an aggressive campaign to hike interest rates that many have expected cause a recession. Some also believe the recent collapse of a handful of regional banks could hurt lending and slow growrth, forcing the Fed to cut rates before inflation is tamed.
Here’s stagflation’s impact in the past:
What is the difference between core consumer price and overall consumer price index?
While the Consumer Price Index measures how average prices shift over time for various goods and services, the core consumer price leaves out the costs of energy and food which are particularly volatile.
CPI meaning
The Consumer Price Index (CPI) is a snapshot of how prices shift on average over time for a variety of products and services.
Contributing: The Associated Press
