Those in power are desperately hoping for any sign that inflation is letting up. The latest inflation report from the Bureau of Labor Statistics, released on Tuesday, shows that it’s accelerating, although there are signs that the nature of inflation is changing.
Already, the Federal Reserve has projected six interest rate hikes as means of putting the breaks on inflation. And high inflation is considered a major political problem for the White House. Even if job numbers look great, inflation can still make people doubt the health of the economy.
Politics and Ideas Editor Kay Steiger asked Domestic Economics Reporter Matthew Zeitlin to break down the inflation numbers in this latest report.
G: What does this latest inflation report from the Bureau of Labor Statistics say? Where are the biggest trouble spots when it comes to inflation?
Matthew Zeitlin: The latest numbers from the Bureau of Labor Statistics showed a remarkably high rate of inflation — prices increased 1.2 percent just in March and are up 8.5 percent over the past year. In February, prices were up 0.8 percent, so the March figures are a meaningful acceleration.
The increases in this month were heavily concentrated in stuff that comes from commodities — like food and gasoline. The so-called core index, which is prices excluding food and energy, which can be quite volatile, was up 0.3 percent, a deceleration from February’s 0.5 percent increase.
Overall, however, the story of inflation is a unified one: Prices over the last year, whether you look at all prices or strip out food and energy, have been going up at their fastest pace since the early 1980s.
G: This report covers price changes in March. Is there any impact of the Russian invasion of Ukraine that we can see in the numbers?
MZ: Yes. Food, and especially gasoline, had large one-month increases. Gasoline prices rose, according to the index used to calculate them, 18 percent in March “and accounted for over half of the all items monthly increase,” according to the BLS, while prices for the “food at home” index went up 1.5 percent.
Food and energy prices have been rising before then, the Russian invasion of Ukraine accelerated price hikes, thanks to an American embargo on Russian oil and Western businesses leery of financing or trading Russian commodities, as well as the exclusion of Ukraine, a massive exporter for agricultural commodities like wheat, from the world market.
G: Does this report show a change in where prices are rising? How much of inflation now is attributable to the price of goods whose manufacturing or distribution has been affected by the pandemic?
MZ: One change we’re seeing in the inflation numbers, when you look past the commodity price surges that are directly attributable to the war in Ukraine, is a shift in where it’s happening. Since prices began to take off early last year, much of it was attributable to goods and services that were affected by pandemic-era supply chain issues.
For example, used car prices were at one point increasing over 40 percent from a year prior, thanks to a shortage of the technological components necessary to make new cars and thus an imbalance in demand between used and new cars. That has changed: Used car prices actually dipped substantially in March.
But now we’re seeing more price hikes in services, which make up the majority of consumer spending. Inflation in services not counting energy was 0.6 percent and 4.7 percent over the last year, with spending on housing going up 5 percent in the last year.
G: We last talked about the jobs numbers and wage growth, both of which are looking strong. How does that relate to the inflation numbers we’re seeing now?
MZ: The relationship between employment and inflation is one of the most hotly debated in economics. While economists tend to no longer believe in a direct trade-off between inflation and unemployment, what’s happening right now is that the economy is running hot in every which way.
Layoffs are at near record-low levels, employees are leaving jobs and finding new ones, unemployment is below 4 percent, and total employment is almost at its pre-pandemic levels. This means that employers are worried that if they lay off employees, they won’t be able to hire them back, workers are leaving their current job to get new ones, and the return to the same level of employment is happening far faster following the covid recession than it did following the Great Recession. These are not the signs of an economy about to tip into recession or one that’s deteriorating.
In fact, the stock market responded positively to the report, perhaps seeing in the numbers that while inflation is high, it may not continue to be if energy and food costs moderate.
At the same time, inflation is at near 40-year highs, and real wages are falling for much of the population as the rise in prices for many outpaces any wage gains they’ve experienced.
While everyone’s spending is different, to someone whose wage hasn’t increased much in the last year but is paying more for rent, gas and food, the economy may not look so hot.
G: The Fed said recently that it’s taking steps to curb inflation. What are those steps and when might they take effect in the numbers we’re seeing?
MZ: The big question about inflation and unemployment is this one: Will the Fed’s actions to curb inflation lead to a rise in the unemployment rate as they try to slow down economic activity and price increases to a more sustainable level? The Federal Reserve is expected to raise the federal funds rate, the interest rate it directly controls, at its next meeting in May and could do so by twice as much as they did in March.
While the Fed does not anticipate unemployment skyrocketing in response to their efforts to dull inflation — that the Fed could tip the economy into a recession is the biggest risk inflation poses to employment.
G: Is a recession the only way out of the high inflation numbers? What else could stop it?
MZ: Some, like former Treasury secretary and inflation-predictor Larry Summers, argue “we will not return to 2 percent inflation without having at least a mild recession.”
The Fed still holds out hope they can do both: Keep the economy chugging along with inflation comes down.
While so much of the recession question depends on things besides inflation per se — how the Fed reacts to each inflation report, covid-19′s effect on the global supply chain, the price of commodities like oil in wake of the Russian invasion of Ukraine — continued high inflation increases the chance of a “hard landing” as the Fed feels like it needs to react more and more dramatically to slow price increases.
Thanks to Lillian Barkley for copy editing this article.