U.S. inflation has now declined for 12-straight months.
But in June, consumer prices increased 3% year–on–year. While that’s the lowest the annual inflation rate has been in more than two years, it’s still too high for the Federal Reserve, which is looking to wrestle increases down to about 2%.
To help move things in the right direction, analysts say the central bank will raise its key federal funds rate Wednesday by 0.25% to more than 5%. That would be the highest level since 2007.
By raising its interest rates, the Federal Reserve hopes to make borrowing and investing more expensive, thereby reducing overall demand for goods, services, and labor in the economy.
“Inflation remains stubbornly high,” said Greg McBride, senior vice president and chief financial analyst for Bankrate. “The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation,” McBride said. “So Fed has to pump the brakes a bit more.”
The Federal Reserve is in charge of balancing unemployment and inflation. Right now, the unemployment rate, at 3.6%, remains historically low.
The Federal Reserve believes it can slow the economy to reduce inflation without causing people to lose their jobs en masse.
Rather than put workers directly out of a job, McBride said, the Fed is instead looking to reduce the overall number of job openings relative to unemployed workers. Before the pandemic, there was about one unemployed person per job opening; today there is less than one.
“The labor market is still out of whack,” McBride said. “That can contribute to inflationary pressures.”
While the overall inflation rate has come down, there are key categories of consumer-focused services that have not. In particular, one measure of what has come to be known as “supercore” inflation, which excludes the price of food, gas, and shelter, has been stuck at a 4% annual rate of increase since the first quarter of 2021, according to calculations from the Federal Reserve Board of San Francisco.
This measure includes items like professional and personal care services, among the items on which Americans continue to spend heavily.
The spending, in turn, is creating more demand for workers and subsequently increasing pay.
“The place where we haven’t really seen much progress is in non-housing services,” Fed Chair Jay Powell said this month at a European Central Bank event in Portugal, according to Bloomberg News. “That’s where we’re not seeing a lot of progress yet, and the reason is — one explanation for it is — that labor costs are really the biggest factor by far in most parts of that sector.”
Of course, higher pay is good for workers — and for the first time in the post-pandemic period, data showed inflation-adjusted wages outpacing inflation.
But a rapidly-rising pace of wage increases concerns the Fed because it is linked to higher inflation. Businesses will raise prices if they believe their customers have more money to spend.
Analysts for the Barclays financial group called this a “self-reinforcing loop between employment, income, and spending,” in a note to clients earlier this month.
“We expect the [Federal Reserve] to remain focused on slowing the job market to pave the way for a sustained return to the 2% inflation target,” the analysts wrote.
Source: | This article originally belongs to Nbcnews.com
