Could this be the end of inflation? The Labor Department released its April inflation report on Wednesday, and the picture of the economy that’s developed here is the best we’ve seen in two years. The cost of living, as measured by the consumer price index, rose 4.9 percent during the last year — that’s down from last June’s 9.1 percent peak, and a shade under the level that most economists expected. It’s also the first time in two years that the annual inflation rate has fallen under 5 percent. It’s a sign that this baffling season of inflation may be over. Remember, this was supposed to be a blip. “Transitory,” in the words of Federal Reserve chair Jerome Powell, back when prices started to rise. For a long time, it felt as if the economy were stricken with Long Inflation — an exhausting, if not debilitating, economic malady that had no economic cure.
Still, as low as Wednesday’s reported rate may be, it’s still stubbornly above the ideal 2 percent range that the Fed targets, and the details in Wednesday’s report show that the rest of the way down may be harder to manage. This single report is a little bit all over the place — a collection of both good and discouraging vibes buried in the numbers. How positive or negative it really is depends on your predilection for doomsaying, where you think the source of economic pain really is, and whether you think the Fed will actually make good on what Powell has set out to do. Here are a couple ways to read it.
Good news: Housing costs are cooling
For many people (and most New Yorkers), housing is at least half their paycheck. And during the pandemic, that particular budget line exploded for many people. But in April, housing — the largest single contributor to the inflation rate — fell to the lowest level in at least six months, at 0.4 percent. The way the Labor Department calculates it is a little wonky and backward-looking, but the official numbers are starting to catch up to real-time metrics, like Redfin’s, which has been clocking a decline in people’s rent. “Expectations are that rent-related inflation will indicate definitive signs of easing,” Quincy Krosby, chief global strategist for LPL Financial, said in a note. Goldman Sachs’ economists likewise said that there was a “genuine” slowdown in the cost of housing as fewer people renewed their leases.
A change like this has big implications. It’s impossible at this point to speak of inflation without also talking about the Fed’s response to it, how it hiked interest rates at the fastest pace in 40 years, bringing up the borrowing costs to a level not seen in 16 years. On a pure dollar scale, this affects markets that rely the most on borrowed money — and there are few that are anywhere near as big as the $45 trillion residential-housing market. For those able to get a mortgage, the home automatically becomes an asset against which they can borrow more, fueling even more consumption. Since the Fed’s rate increases are an indirect response to housing costs, it stands to reason that the central bank may start to hit the brakes on jacking up rates now that costs are starting to cool.
Bad news: The Fed may still have reason to keep raising rates
Powell gave a press conference last week where he expressly would not commit to pausing interest rate hikes and expressed befuddlement at what was going on with the job market. “It wasn’t supposed to be possible for job openings to decline by as much as they’ve declined without the unemployment rate going up. Well, that’s what we’ve seen,” he said. (The most recent unemployment numbers hadn’t been publicly released, but the Fed likely got an early look at them.) When the Fed considers what it should do at any given meeting, one of the biggest considerations is how the employment picture looks in conjunction with the inflation rate. Whether this inflation report is low enough for it to nullify the surge in jobs last month (which could theoretically be inflationary) is not very clear at this point.
There’s been an outside probability that the Fed would keep hiking — last week, it was a little better than one-in-ten odds. After the report, it’s about one in five. Yes, the overall headline number is good, but is it good enough?
Good news*: Prices at the pump and the supermarket are easing
From a household perspective, managing inflation is hardest when it comes to everyday things. Last year, gas was the big shocker, peaking above $5 a gallon. There were also big price spikes for many food staples, including eggs, beef, and milk. Last month, though, the cost of food was flat, with most groceries falling in price.
That is definitely good news. But there’s also a caveat (hence the asterisk): The Fed doesn’t really care. Food and gas prices (the latter of which rose last month) are excluded from the central bank’s preferred “core” gauge of inflation because they tend to bounce around so much, vulnerable as they are to things like natural disasters or weird weather. Oh, and the cost of eating out also went up in April — so that may have canceled out your supermarket savings.
Good news: Airline and hotel costs are falling
The price of a plane ticket fell 2.6 percent from March to April. Hotels dropped 3.4 percent. Go ahead, take that vacation. You deserve it!
Bad news: Some important costs are still rising
The price of used cars jumped higher last month, by 4.4 percent, the largest increase in about two years. And the cost of clothes and services both rose last month at a pace that, if it were to continue, would be higher than the Fed’s preferred 2 percent range.
These are all reflected in the “core” inflation rate that the Fed looks at so closely. In April, it came in at nearly 5.6 percent — higher than the headline rate. While that’s about where economists expected it to be, that undercuts some of the reasoning behind thinking that the fight over inflation is just about over. Stay tuned!
