The biggest economic story of the post-pandemic era has been inflation.
This is a story with two distinct stages at first. First came a sharp acceleration in price growth amid reopenings and job turnover, when 12-month inflation rose from less than 1% in June 2020 to more than 9% in June 2022.
Then the fever broke, with price growth slowing to just 3.1% in June 2023 over the next 12 months.
But now it is clear that a third chapter has emerged: the stable. In the last nine months, the level of annual inflation was between 3% and 4%.
On Tuesday, the Bureau of Labor Statistics reported that the Consumer Price Index rose 3.2% in February – missing expectations for a slightly lower 3.1% reading and higher than the 3.1% seen in January.
On a monthly basis, prices rose 0.4% in February compared to 0.3% in January. This was in line with expectations. But the core reading, which excludes volatile food and energy prices, came in at 0.4%, above expectations for a 0.3% reading.
“Inflation remains unusually high,” Jason Furman, a Harvard economics professor and former head of the White House Council of Economic Advisers under President Barack Obama, wrote on Tuesday morning’s X. three-month averages are taken into account.
Experts have started to warn about this since last year the so-called last milef marathon The 2% target will be the most difficult to achieve. Now it seems that these fears were justified.
“I think the market has gotten ahead of itself as to how soon we’re going to get back to 2%,” said Michael Antonelli, managing director and market strategist at financial group Baird & Co.
The biggest obstacle, he said, is getting what the Bureau of Labor Statistics calls shelter spending down. These costs fall into two main categories: rent and homeownership, called equivalent rent to owners.
Both categories have spent months defying forecasts of a significant slowdown in price growth, which now remains above 6% on a 12-month basis in January.
In February, shelter costs were once again stubbornly high, rising 5.7%.
“We thought the components, particularly shelter, which makes up the bulk of the CPI — it’s a huge weight in the index — were going to decline further,” Antonelli said.
On Monday, real estate group Redfin reported that rents rose 2.2% year over year to $1,981 in February. This is the biggest gain since January 2023. It increased by 0.9% during the month.
Some data on the strength of the economy is moving forward stayetc contradictory. Last week’s employment report showed that while the economy continued to add jobs at a healthy clip, the unemployment rate rose.
Other factors remain at work. Citibank analysts said in a note to clients on Monday that supply chain problems, particularly related to the Red Sea issue, could start to show again in the form of higher commodity prices.
Citi analysts wrote, “We do not expect inflation data for the coming months to have much of an impact from the strong January data.”
Antonelli said the market and the economy are healthy — so much so that instead of the “soft recession” the Fed was hoping for, where inflation continues to fall without a significant increase in unemployment, consumers are now looking at “no recession.” scenario.
This is not necessarily a bad thing. It just means that the inflation predicted above is likely to be here for a while.
“Soft landing” means we’re kind of close to the ground, but we’ve moved into the ‘no landing’ category,” Antonelli said. “We’re in a position where we have good demographics, a vibrant economy, [artificial intelligence]the housing market is strong — everything we’re seeing the economy do now.”
However, wages have barely outpaced inflation, leaving workers barely afloat. Today, inflation-adjusted weekly earnings are about $371, compared with $367 in the months just before the pandemic.
“It’s like reaching into your pocket and seeing a bill drop,” says Mark Hamrick, chief economic analyst and Washington bureau chief at Bankrate Financial Group. “You can put it back – but you won’t get any recovery from the loss in your purchasing power.”
For the Fed to raise interest rates without creating an unemployment crisis means that rates will remain high for a while, as it sees more risk from a rebound in prices than the threat of a rapid rise in unemployment.
As traders bet the first post-pandemic rate cut will come in June, the new Reuters survey Respondents now believe there will be fewer rate cuts this year than forecast.
In recent testimony to Congress, Fed Chairman Jerome Powell said the first rate cut in the post-pandemic era would likely come this year — but he could not say when given ongoing inflationary pressures.
Other forecasts see global economic conditions that could keep the US at 3% inflation indefinitely. David Andolfatto, a former Fed official who now chairs the economics department at the University of Miami’s business school, said ongoing geopolitical turmoil and demand for defense spending will likely keep prices up. growth company.
Persistent federal budget deficits—a phenomenon that both political parties seem unwilling to address—don’t help either.
“These types of economies tend to overheat,” Andolfatto said. “I’m just seeing fiscal pressures from both sides, and I’m seeing inflation pull back — compared to the previous decade, where we hit low — I just think the world is going.”