WASHINGTON (AP) — A key question dominating discussions about the U.S. economy is whether inflation, currently at elevated levels, will continue or if the previous year's decline will resume soon.
The government is scheduled to release the latest monthly inflation report on Wednesday, which will be closely watched by economists, Wall Street traders, and Federal Reserve officials. Analysts predict that year-over-year inflation eased slightly from 3.5% in March to 3.4% in April, according to a survey by data provider FactSet. Month-to-month, consumer prices are expected to have increased by 0.4%, matching the previous month.
There's some hope that core inflation, which excludes volatile food and energy costs, might offer relief, with forecasts suggesting a slowdown to 3.6%, the lowest level in three years, down from 3.8% in March. Core prices are believed to have risen 0.3% from March to April, down from the previous 0.4%. The Fed closely monitors core prices as they provide a clearer indication of inflation's trajectory.
The course of inflation is likely to have a significant impact on this year's presidential race. Critics of President Joe Biden from the Republican Party have tried to attribute high prices to the president, aiming to derail his re-election bid. Despite robust hiring and healthy wage growth on average, prices remain significantly higher than pre-pandemic levels.
On Tuesday, Fed Chair Jerome Powell reiterated his expectation that inflation will eventually reach the central bank's 2% target. However, he admitted during a panel discussion in Amsterdam that his confidence in this forecast has waned after three consecutive months of elevated price readings. Inflation has dropped sharply from its peak of 9.1% in the summer of 2022 but is currently higher than in June 2023, when it first hit 3%.
To combat rising prices, the Fed's policymakers have raised their key interest rate to a 23-year high of 5.3%. Powell emphasized on Tuesday that the Fed will maintain this rate until inflation is fully under control, indicating that rate cuts are not imminent, as many had hoped.
Powell's comments have dampened expectations on Wall Street for three rate cuts this year, a projection the central bank's officials had made as recently as March. Now, many economists anticipate only one or two reductions this year, possibly starting in September.
Economists are divided on whether recent high inflation figures signal a resurgence in price growth or are lingering effects of pandemic-related price distortions. For instance, while auto insurance has surged by 22% from a year ago, this increase may be due to factors specific to the auto industry, such as higher repair and replacement costs following the pandemic-induced jump in new car prices.
Persistent inflation is also driven by significantly elevated apartment rents. While rents for new leases are rising slowly, consistent with pre-pandemic trends, earlier increases are still impacting the overall inflation data.
According to Alan Detmeister, an economist at UBS and former Fed staffer, rents and auto insurance are primarily responsible for the elevated inflation readings. Detmeister noted, "Everything else is pretty much fine. Inflation is still coming down, though not as rapidly as we had hoped."
Steady consumer spending on restaurant meals, travel, and entertainment, where price increases have also been notable, indicates strong demand in these sectors.
Powell, in his remarks on Tuesday, highlighted rising rents as a key factor driving high inflation. He described this trend as "a bit of a puzzle" because measures of new apartment leases show rents barely increasing. The lag in this weaker data flowing into the government’s measures, which encompass all rents including lease renewals with larger increases, is likely contributing to the inflationary pressures.
Powell also acknowledged that the economy "is different this time" due to many Americans refinancing their mortgages at very low rates before the Fed began raising borrowing costs in March 2022. He also noted that many large businesses locked in low rates during that period.
He suggested that the Fed's rate policy might not be as potent on the economy as it would have been if these factors were not in play.