It was a triple whammy for economic data lovers.
The Bureau of Labor Statistics released its most recent inflation figures on June 12, 2024, day. The announcement was fairly good, showing that prices rose 3.3 % in the year to May 2024– less than some economists had expected.
The Federal Reserve held interest rates steady as forecasters had anticipated and released an updated set of financial projections as the conference came to a close, a few hours later.
What does it all mean? Economicist Christopher Decker was asked to explain by The Conversation US.
What are the main conclusions drawn from the most recent inflation review?
The May prices price– as measured by the Consumer Price Index for All Urban Consumers, or CPI- U – was down a little from April, but not by much. Generally, this implies that not much changed on the prices before, and it’s been like this for a while today.
This is n’t a bad thing, though. I prefer to view inflation in the long run: it has actually stabilized around 3.3 %. In fact, we’ve been around 3 % to 3.7 % for 12 months now. So we also have income and job growth as well as stable price rise, even if it is higher than the Fed’s target level of 2 %. The state of the economy is still powerful.
In terms of the details, power prices are down compared with previous month– but electricity prices tend to be dangerous, but that might be a speck in the data, not a true trend. The labour markets are also constrained. In May, average weekly earnings increased by 4.1 % over the same period last year, indicating that businesses must pay higher wages to attract and keep new hires.
In May, prices- adjusted profits increased 0.5 % from April to May of this year. Consumer spending, which accounts for two-thirds of the British gross domestic product, will likely increase as income outpace inflation. Payments increased by 272, 000 in May, away from 165, 000 and 310, 000 in April and March, both.
In brief, this statement, along with other new information reports, continues to show a very robust and stable economy.
Why has inflation stayed above the Federal Reserve’s 2 % goal for so long?
Accommodation costs and prices are the main causes of the inflation’s continued upwards of 2 %. Higher construction and maintenance fees, as well as a strong demand from people who are priced out of ownership, are driving rental prices upwards. House prices and mortgage rates remain high, making household purchases difficult, especially for primary- day homebuyers.
The Fed maintained interest rates today and indicated it may probably cut rates once more in 2024. However, politicians were considering three price cuts this year just three months ago. What changed?
The Fed is quite data- driven, and when the information changes, the Fed changes program.
Since March 2022, the Fed has raised costs more than ten days. This was done in an effort to halt economic expansion and thus halt prices. I believe that many policymakers believed that may cause the inflation rate to fall more quickly than it did. Instead, employment growth remained stronger than expected.
In many ways, the labour market is also working through Covid- related problems. Some workers slowly reentered the workplace. Thus, production was enhance to meet demand for goods and services. This meant that even with significantly higher inflation, there was room for the economy to grow.
Additionally, the U.S. experienced offer problems unlike anyone in recent memory. We’re likely also dealing with a few remaining effects around, as well. Higher prices helped, however, decrease prices down by not 2 % as a result.
Presently, time will tell if we are at a fresh standard. The Fed clearly does n’t think so. It’s still holding fast to 2 % prices. We might see some higher wage rises than pre-Covid costs if the labour market does seem to be returning to where it is right now. As businesses try to maintain profit profits while covering higher labour costs, this could lead to significantly higher inflation rates.
Why do so many Americans have mixed feelings about the market if inflation is steady and wages have increased?
People tend to compare the prices they paid years ago, in my opinion, because they do n’t care so much about month-to-month inflation as much. For example, the average cost of a few eggs is about US$ 2.70 now, whereas before Covid it was$ 1.46 or so. People remember that and feeling ripped off because they forgot that egg were$ 4.82 in the beginning of 2023 and have generally decreased since.
What do you anticipate happening throughout the year?
Even if the Fed’s 2 % inflation target is left out, the current macroeconomic data does n’t really suggest that we need to change interest rates. Economic growth is n’t slowing dramatically, so cutting rates is n’t necessary. And inflation is n’t accelerating, so increasing rates is n’t justified.
Holding prices continuous is currently the most prudent course of action for some potential homebuyers, as difficult as that may be.
What do you anticipate happening over the long term?
I was checking out the most recent “dot plot” from the Fed, which shows where each of the voting officials anticipates standard interest rates to end in 2024, 2025, and 2026.
The majority of officials believe that the federal funds rate, which is currently at 5.3 %, will stay at this level for the remainder of the year before dropping a little above 4 % in 2025. Most then believe it will accomplish 3.25 % or so by 2026. So they are betting on the need for price reductions in 2025 and 2026.
For me, this makes feeling, without a doubt, in 2025. Both the market and the employment industry are showing signs of sluggishness. Anticipate any moves toward price cuts to be continuous, though. A gradual lowering of the Fed’s policy is a good bet as long as there are n’t any significant increases in the key job and inflation data.
Christopher Decker is Professor of Economics, University of Nebraska Omaha
This content was republished from The Conversation under a Creative Commons license. Read the original post.