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Companies Push Prices Higher, Protecting Profits but Adding to Inflation

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Corporate profits have been bolstered by higher prices even as some of the costs of doing business have fallen in recent months.The prices of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Yet many big businesses have continued raising prices at a rapid clip.Some of the world’s biggest companies have said they do not plan to change course and will continue increasing prices or keep them at elevated levels for the foreseeable future.That strategy has cushioned corporate profits. And it could keep inflation robust, contributing to the very pressures used to justify surging prices.As a result, some economists warn, policymakers at the Federal Reserve may feel compelled to keep raising interest rates, or at least not lower them, increasing the likelihood and severity of an economic downturn.“Companies are not just maintaining margins, not just passing on cost increases, they have used it as a cover to expand margins,” Albert Edwards, a global strategist at Société Générale, said, referring to profit margins, a measure of how much businesses earn from every dollar of sales.PepsiCo, the snacks and beverage maker, has become a prime example of how large corporations have countered increased costs, and then some.Hugh Johnston, the company’s chief financial officer, said in February that PepsiCo had raised its prices by enough to buffer further cost pressures in 2023. At the end of April, the company reported that it had raised the average price across its products by 16 percent in the first three months of the year. That added to a similar size price increase in the fourth quarter of 2022 and increased its profit margin.“I don’t think our margins are going to deteriorate at all,” Mr. Johnston said in a recent interview with Bloomberg TV. “In fact, what we’ve said for the year is we’ll be at least even with 2022, and may in fact increase margins during the course of the year.”The bags of Doritos, cartons of Tropicana orange juice and bottles of Gatorade drinks sold by PepsiCo are now substantially pricier. Customers have grumbled, but they have largely kept buying. Shareholders have cheered. PepsiCo declined to comment.PepsiCo is not alone in continuing to raise prices. Other companies that sell consumer goods have also done well.The average company in the S&P 500 stock index increased its net profit margin from the end of last year, according to FactSet, a data and research firm, countering the expectations of Wall Street analysts that profit margins would decline slightly. And while margins are below their peak in 2021, analysts are forecasting that they will keep expanding in the second half of the year.For much of the past two years, most companies “had a perfectly good excuse to go ahead and raise prices,” said Samuel Rines, an economist and the managing director of Corbu, a research firm that serves hedge funds and other investors. “Everybody knew that the war in Ukraine was inflationary, that grain prices were going up, blah, blah, blah. And they just took advantage of that.”But those go-to rationales for elevating prices, he added, are now receding.The Producer Price Index, which measures the prices businesses pay for goods and services before they are sold to consumers, reached a high of 11.7 percent last spring. That rate has plunged to 2.3 percent for the 12 months through April.The Consumer Price Index, which tracks the prices of household expenditures on everything from eggs to rent, has also been falling, but at a much slower rate. In April, it dropped to 4.93 percent, from a high of 9.06 percent in June 2022. The price of carbonated drinks rose nearly 12 percent in April, over the previous 12 months.“Inflation is going to stay much higher than it needs to be, because companies are being greedy,” Mr. Edwards of Société Générale said.But analysts who distrust that explanation said there were other reasons consumer prices remained high. Since inflation spiked in the spring of 2021, some economists have made the case that as households emerged from the pandemic, demand for goods and services — whether garage doors or cruise trips — was left unsated because of lockdowns and constrained supply chains, driving prices higher.David Beckworth, a senior research fellow at the right-leaning Mercatus Center at George Mason University and a former economist for the Treasury Department, said he was skeptical that the rapid pace of price increases was “profit-led.”Corporations had some degree of cover for raising prices as consumers were peppered with news about imbalances in the economy. Yet Mr. Beckworth and others contend that those higher prices wouldn’t have been possible if people weren’t willing or able to spend more. In this analysis, stimulus payments from the government, investment gains, pay raises and the refinancing of mortgages at very low interest rates play a larger role in higher prices than corporate profit seeking.“It seems to me that many telling the profit story forget that households have to actually spend money for the story to hold,” Mr. Beckworth said. “And once you look at the huge surge in spending, it becomes inescapable to me where the causality lies.”Mr. Edwards acknowledged that government stimulus measures during the pandemic had an effect. In his eyes, this aid meant that average consumers weren’t “beaten up enough” financially to resist higher prices that might otherwise make them flinch. And, he added, this dynamic has also put the weight of inflation on poorer households “while richer ones won’t feel it as much.”The top 20 percent of households by income typically account for about 40 percent of total consumer spending. Overall spending on recreational experiences and luxuries appears to have peaked, according to credit card data from large banks, but remains robust enough for firms to keep charging more. Major cruise lines, including Royal Caribbean, have continued lifting prices as demand for cruises has increased going into the summer.Many people who are not at the top of the income bracket have had to trade down to cheaper products. As a result, several companies that cater to a broad customer base have fared better than expected, as well.McDonald’s reported that its sales increased by an average of 12.6 percent per store for the three months through March, compared with the same period last year. About 4.2 percent of that growth has come from increased traffic and 8.4 percent from higher menu prices.The company attributed the recent menu price increases to higher expenses for labor, transportation and meat. Several consumer groups have responded by pointing out that recent upticks in the cost of transportation and labor have eased.A representative for the company said in an email that the company’s strong results were not just a result of price increases but also “strong consumer demand for McDonald’s around the world.”Other corporations have found that fewer sales at higher prices have still helped them earn bigger profits: a dynamic that Mr. Rines of Corbu has coined “price over volume.”Colgate-Palmolive, which in addition to commanding a roughly 40 percent share of the global toothpaste market, also sells kitchen soap and other goods, had a standout first quarter. Its operating profit for the year through March rose 6 percent from the same period a year earlier — the result of a 12 percent increase in prices even as volume declined by 2 percent.The recent bonanza for corporate profits, however, may soon start to fizzle.Research from Glenmede Investment Management indicates there are signs that more consumers are cutting back on pricier purchases. The financial services firm estimates that households in the bottom fourth by income will exhaust whatever is collectively left of their pandemic-era savings sometime this summer.Some companies are beginning to find resistance from more price-sensitive customers. Dollar Tree reported rising sales but falling margins, as lower-income customers who tend to shop there searched for deals. Shares in the company plunged on Thursday as it cut back its profit expectations for the rest of the year. Even PepsiCo and McDonald’s have recently taken hits to their share prices as traders fear that they may not be able to keep increasing their profits.For now, though, investors appear to be relieved that corporations did as well as they did in the first quarter, which has helped keep stock prices from falling broadly.Before large companies began reporting how they did in the first three months of the year, the consensus among analysts was that earnings at companies in the S&P 500 would fall roughly 7 percent compared with the same period in 2022. Instead, according to data from FactSet, earnings are expected to have fallen around 2 percent once all the results are in.Savita Subramanian, the head of U.S. equity and quantitative strategy at Bank of America, wrote in a note that the latest quarterly reports “once again showed corporate America’s ability to preserve margins.” Her team raised overall earnings growth expectations for the rest of the year, and 2024. More

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    Consumer Spending Rose More Than Expected in April

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    New data on spending and income suggest that the economy remains robust despite the Federal Reserve’s interest rate increases.Americans’ income and spending both rose in April, a sign of economic resilience amid rising prices and warnings of a possible recession.Consumer spending increased 0.8 percent in April, the Commerce Department said Friday. The uptick followed a two-month slowdown in spending and exceeded forecasters’ expectations, as Americans shelled out for cars, restaurant meals, movie tickets and other goods and services.After-tax income rose 0.4 percent, fueled by a strong job market that continues to push up wages and bring more people into the work force. Data from the Labor Department this month showed that Americans in their prime working years were employed in April at the highest rate in more than two decades.Separate data released by the Commerce Department on Friday showed that a key measure of business investment also picked up in April, a sign that corporate executives aren’t expecting a major slump in demand in coming months.Consumers’ resilience is a mixed blessing for officials at the Federal Reserve, who worry that robust spending is contributing to inflation, but who also don’t want it to slow so rapidly that the economy falls into a recession. The gradual slowdown in spending seen in recent months is broadly consistent with the “soft landing” scenario that policymakers are aiming for, but they have been wary of declaring victory too soon — a concern that April’s data, which showed persistent inflation alongside stronger spending, could underscore.“The odds of a recession dropped again,” wrote Robert Frick, corporate economist with Navy Federal Credit Union, in a note to clients on Friday. “The one problem from the report is inflation remains stubbornly high, and may tempt the Fed to raise the federal funds rate even more, when a pause was on the table,” he added, referring to the upcoming meeting of policymakers in June.It is unclear how long consumers can continue to prop up the economic recovery. Savings that some households built up in the pandemic have begun to dwindle, and there are signs companies are beginning to pull back on hiring. The standoff over the debt limit could further sap the economy’s momentum, although there were signs on Thursday evening that leaders in Washington were closing in on a deal to avert a default. More

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    Inflation Persists and Car Prices Are a Big Reason

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    Prices of new and used vehicles were supposed to recede quickly as supply chain problems dissipated. The market had other ideas.‌Car prices soared after the coronavirus lockdowns, and two years into the United States’ worst inflationary episode since the 1980s, the industry demonstrates that getting back to normal will be a long and lurching ride.In 2021 and early 2022, global shipping problems, a semiconductor shortage and factory shutdowns coincided with strong demand to push vehicle prices sharply higher. Economists had hoped that prices might ease as supply chains healed and the Federal Reserve’s interest rate increases deterred borrowers.Instead, prices for new cars have risen further. Domestic automakers are still producing fewer cars and focusing on more profitable luxury models. Used car prices helped to lower overall inflation late last year, but rebounded in April as short supply collided with a surge in demand.Echoes from the industry’s pandemic disruptions are reverberating through the economy even though the emergency has formally ended, and illustrate why the Fed’s fight to quash inflation could be a long one as consumers continued spending despite higher prices.A Wild Ride for Car PricesUsed car prices have been volatile, while new car costs have continued to climb, adding to overall inflation.

    Source: Bureau of Labor Statistics By The New York Times“Inflation is not going to be a smooth path downward — there are going to be bumps along the road,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “There are so many idiosyncratic factors at play right now, and I think some of that has to do with demand post-pandemic.”Elevated car prices have proved uncomfortably sticky. Used car prices have declined, but in a more muted — and volatile — fashion than economists had anticipated. And new cars have continued to get more expensive this year as manufacturers strive to maintain the margins established in 2021.“The big question now is: Are companies going to start competing with one another on price?” Ms. Uruci asked.But that’s a difficult question to answer, because the automotive market has drastically changed. To understand the situation, it’s useful to examine how the auto industry worked before.“Going into the pandemic, the dynamic in the automobile business was this idea that retail profitability was under constant pressure, driven by the internet,” said Pat Ryan, the chief executive of CoPilot, a car shopping app that monitors prices across about 40,000 dealerships.Automakers produced more cars than the marketplace demanded, offering incentives to clear inventory and compete with lower-cost imports. Dealers made their profits on volume and financing, often resulting in customer complaints of excess fees.As the coronavirus spread, factories shut down. Even when they reopened, semiconductors remained scarce. Manufacturers allocated chips to their highest-priced models — trucks and sport utility vehicles — offsetting lower volume with higher profits on each sale. About five million cars that normally would have been produced never were, Mr. Ryan said.Dealers got in on the action, charging thousands of dollars above list price — especially as stimulus programs rolled out, and consumers sought to upgrade their vehicles or buy new ones to escape cities. A study by the economist Michael Havlin, published by the Bureau of Labor Statistics, found that dealer markups accounted for 35 percent to 62 percent of total new-vehicle consumer inflation from 2019 to 2022.There were downsides to the lower sales volumes; dealerships also make money on service packages years after cars drive off the lot. But on balance, “it was the best of times for car dealers, for sure,” Mr. Ryan said.It was the worst of times, however, for anyone who suddenly needed a car.Hailey Cote with her recently purchased Toyota Corolla.Ross Mantle for The New York TimesThat’s the position that Hailey Cote of Pittsburgh found herself in last summer. After tiring of low-wage jobs on farms and in restaurants, she built a business cleaning houses for $25 an hour. When her 2005 Jeep Grand Cherokee broke down, she knew she had to find a replacement quickly to ferry cleaning gear to each job and get to school, where she’s pursuing a degree in counseling.At that point, the used cars she could find were only a few thousand dollars less than the cheapest new cars, so she went with a 2022 base model Toyota Corolla. Her loan payment is about $500 a month. Insurance, which has also become more expensive, is another $200. Including gas and maintenance, Ms. Cote’s transportation cost is almost as much as her rent, leaving nothing for savings or recreation.“I think it’s the basic necessities that are really the worst,” Ms. Cote, 29, said. “Food’s gone up a bit, but the cost of housing, health care and cars is pretty brutal.”The car price frenzy began to ease in the second half of 2022, as more vehicles started rolling off assembly lines. But the supply has risen only gradually. Automakers, loath to relinquish profits enabled by scarcity, started talking about exercising “discipline” in their production targets.“During this two-year period, auto dealers and auto manufacturers discovered that a low-volume, higher-price model was actually a very profitable model,” Tom Barkin, the president of the Federal Reserve Bank of Richmond, said in an interview.Car Dealers Reap Big Profits in Inflation EraCar companies have been increasing prices by more than their input costs have climbed, leading to big profits on new vehicles.

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    Percent markups for publicly traded dealerships
    Source: Michael Havlin (Bureau of Labor Statistics)By The New York Times“The experience of higher prices, and the ability to move prices, does broaden the perspectives of business people in terms of what their options are,” he said. “It’s attractive if you can do it.”One way the automakers tried to buoy prices was jettisoning cheaper models, like the Chevrolet Spark and Volkswagen Passat. Responding to federal subsidies, car companies rolled out electric vehicles, but that didn’t help to bring prices down — they started with luxury versions, like the $42,995 Mustang Mach-E.And there have been added supply constraints. The generation of cars that would typically be coming off three-year leases is smaller than usual. Those who leased cars in the spring of 2020 have an incentive to buy them at the prices that were locked in before everything became more expensive.On top of that, some rental car companies are aggressively restocking their fleets after being starved for several years, leading dealership groups like Sonic Automotive to complain on earnings calls that they’re being outcompeted at auctions.“There are so many sources of used vehicles that just dried up over the last few years,” said Satyan Merchant, a senior vice president for financial services at TransUnion, a credit monitoring company. “And it all has this downstream effect.”The Fed has been raising interest rates sharply to slow demand — including for cars — and cool price increases. But during the adjustment period, that is making it even tougher for many Americans to afford a vehicle. According to TransUnion, the average monthly payment for a new car rose to $736 in the first quarter of 2023, from $585 two years before. Used cars average $523 per month, up $110 over the same period.Prices for Cars of All Ages Are Above Prepandemic LevelsA new car will run you about $51,000 on average – about 30 percent more than in January 2020. 

    Source: CoPilotBy The New York TimesCars are now a bifurcated market: Demand remains strong on the high end, where wealthy buyers with excess savings from the past two-plus years are able to absorb higher interest rates, or simply pay cash. Some are only now receiving vehicles they ordered in 2022 at inflated prices.Competition for vehicles is also fierce on the low end, since people with thin financial cushions and in-person jobs can’t afford to forgo transportation, which in most of the country is synonymous with a car. The job market has remained strong, especially for in-person jobs in fields like hospitality and health care, so more people have workplaces to get to.And many people in between, who might switch cars every few years, are waiting for prices to fall.“What we’ve seen is the disappearance of the middle,” said Scott Kunes, chief operating officer of a dealership group in the Midwest. He faults the automakers for abandoning cheaper, smaller, basic cars that people need just to get around, especially as interest rates put fancier versions beyond reach. “It doesn’t make any sense to me at all.”The situation may start to resolve itself soon. Wholesale car prices have begun to fall, and carmakers are offering more incentives. Kelley Blue Book data shows that average prices have fallen below list for the past two months, which Jonathan Smoke, chief economist at Cox Automotive, said signaled that demand was easing. Prices have come down in recent months for electric cars — the fastest-growing segment of new car sales, though a small portion of the overall market.Recent history has shown, however, that pricing trajectories are rarely linear. Adam Jonas, an auto industry analyst with Morgan Stanley, said that over the short to medium term, more inventory was the only answer.“Even though the statements from the Japanese and the Koreans are that the chip shortage is ending, it takes many months to spool it up,” he said. “Dealers should prepare for a tight summer.”Jack Ewing More

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    G.D.P. Report: U.S. Economy Grew at 1.1% Rate in First Quarter

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    The gross domestic product increased for the third straight quarter as consumer spending remained robust despite higher interest rates.Higher interest rates took a toll on the U.S. economy in early 2023, but free-spending consumers are keeping a recession at bay, at least for now.Gross domestic product, adjusted for inflation, rose at a 1.1 percent annual rate in the first quarter, the Commerce Department said on Thursday. That was down from a 2.6 percent rate in the last three months of 2022 but nonetheless represented a third straight quarter of growth after output contracted in the first half of last year.The figures are preliminary and will be revised at least twice as more complete data becomes available.Growth in the first quarter was dragged down by weakness in housing and business investment, both of which are heavily influenced by interest rates. The Federal Reserve has raised rates by nearly five percentage points since early last year in an effort to tamp down inflation.Consumers, however, have proved resilient in the face of both rising prices and higher borrowing costs. Inflation-adjusted spending rose at a 3.7 percent annual rate in the first quarter, up from 1 percent in the prior period. Consumers have been buoyed by a strong job market and rising wages, which have helped offset high prices.Spending slowed as the quarter progressed, however, and forecasters warn that it could weaken further amid headlines about layoffs, bank failures and warnings of a possible recession.“Consumer spending is still moving up, but I don’t know how long that can last,” said Ben Herzon, an economist at S&P Global Market Intelligence. “Confidence is weak and has been weakening. You’ve got to wonder, will that soon translate into a pullback in spending?”A gradual slowdown would be welcomed by Fed policymakers, who have been trying to cool off the economy enough to bring down inflation, but not by so much that it leads to widespread layoffs and unemployment.“It’s not a free fall,” said Dana Peterson, chief economist at the Conference Board, a business group. “It’s a controlled descent, and that’s what the Fed is trying to achieve with higher interest rates.” More

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    Wages May Not Be Inflation’s Cause, but They’re the Focus of the Cure

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    While fear of a “wage-price spiral” has eased, the Federal Reserve’s course presumes job losses and risks a recession. Some see less painful remedies.As Covid-19 eased its debilitating grip on the U.S. economy two years ago, businesses scrambled to hire. That lifted the pay of the average worker. But as one economic challenge ended, another potential problem emerged.Many economic analysts feared that a wage-price spiral was forming, with employers trying to recover the higher labor costs by increasing prices, and workers in turn continually ratcheting up their pay to make up for inflation’s erosion of their buying power.As wages and prices have risen at the fastest pace in decades, however, it has not been an evenly matched back and forth. Inflation has outstripped wage growth for 22 consecutive months, as calculated by economists at J.P. Morgan.That has prompted economists to debate how much, if at all, pay has driven the current bout of inflation. As recently as November, the Federal Reserve chair, Jerome H. Powell, said at a news conference, “I don’t think wages are the principal story for why prices are going up.”At the same time, influential voices on Wall Street and in Washington are arguing over whether workers’ earnings growth — which, on average, has already slowed — will need to let up further if inflation is to ease to a rate that policymakers find tolerable.Wage growth has not kept up with inflationYear-over-year percentage change in earnings vs. inflation through February More

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    The Fed’s Preferred Inflation Gauge Cooled Notably in February

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    A closely watched measure of price increases provided encouraging news as the Fed considers when to stop raising rates.The measure of inflation most closely watched by the Federal Reserve slowed substantially in February, an encouraging sign for policymakers as they consider whether to raise interest rates further to slow the economy and bring price increases under control.The Personal Consumption Expenditures Index cooled to 5 percent on an annual basis in February, down from 5.3 percent in January and slightly lower than economists in a Bloomberg survey had forecast. It was the lowest reading for the measure since September 2021.After the removal of food and fuel prices, which are volatile from month to month, a “core” measure that tries to gauge underlying inflation trends also cooled more than expected on both an annual and a monthly basis.The data provides the latest evidence that inflation has turned a corner and is decelerating, though the process is gradual and bumpy at times. And the report is one of many that Fed officials will take into account as they approach their next interest rate decision, on May 3.Central bankers are watching how inflation, the labor market and consumer spending shape up. They will be monitoring financial markets and credit measures, too, to get a sense of how significantly recent bank failures are likely to weigh on lending, which could slow the economy.Fed officials have raised rates rapidly over the past year to try to rein in inflation, pushing them from near zero a year ago to just below 5 percent this month. But policymakers have suggested that they are nearing the end, forecasting just one more rate increase this year.Jerome H. Powell, the Fed chair, hinted that officials could stop adjusting policy altogether if the problems in the banking sector weighed on the economy significantly enough, and policymakers this week have reiterated that they are watching closely to see how the banking problems impact the broader economy.“I will be particularly focused on assessing the evolution of credit conditions and their effects on the outlook for growth, employment and inflation,” John C. Williams, the president of the Federal Reserve Bank of New York, said during a speech on Friday.But inflation remains unusually rapid: While it is slowing, it is still more than double the Fed’s 2 percent target. And the turmoil at banks seems to be abating, with government officials in recent days saying that deposit flows have stabilized.“Even with this report, the U.S. macro data is still on a stronger and hotter trajectory than appeared to be the case at the start of this year,” Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, wrote in a note after the release.In fact, officials speaking this week have suggested that they might need to do more to wrangle price increases, and they have pushed back on market speculation that they could lower rates this year.“Inflation remains too high, and recent indicators reinforce my view that there is more work to do,” Susan Collins, president of the Federal Reserve Bank of Boston, said at a speech on Thursday. Ms. Collins does not vote on policy this year.The report on Friday also showed that consumer spending eased in February from the previous month. A measure of personal spending that is adjusted for inflation fell by 0.1 percent, matching what economists expected. But the data was revised up for January, suggesting that consumer spending climbed more rapidly than previously understood at the start of the year.And when it comes to prices, some economists warned against taking the February slowdown as a sign that the problem of rapid increases was close to being solved. A measure of inflation that excludes housing and energy — which the Fed monitors closely — has been firm in recent months.“That acceleration in underlying inflation measures is what has set off alarm bells at the Federal Reserve and prompted officials to stick to rate hikes, despite the recent credit market volatility,” Diane Swonk, chief economist at KPMG, wrote in an analysis Friday.And Omair Sharif, founder of Inflation Insights, said much of the February slowdown came from price categories that are estimated using statistical techniques — and that can sometimes give a poor signal of the true trend.“I really would not bank on this number,” he said in an interview. “My expectation would be that we’ll probably see some of this bounce back next month.” More

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    Republicans Say Spending Is Fueling Inflation. The Fed Chair Disagrees.

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    Jerome H. Powell has said that snarled supply chains, an oil shock following Russia’s invasion of Ukraine and shifts among American consumers are primarily behind rapid price growth.WASHINGTON — The chair of the Federal Reserve, Jerome H. Powell, has repeatedly undercut a central claim Republicans make as they seek sharp cuts in federal spending: Government spending is driving the nation’s still-hot inflation rate.Republican lawmakers say spending programs signed into law by President Biden are pumping too much money into the economy and fueling an annual inflation rate that was 6 percent in February — a decline from last year’s highs, but still well above historical norms. Mr. Powell disputed those claims in congressional testimony earlier this month and in a news conference on Wednesday, after the Fed announced it would once again raise interest rates in an effort to bring inflation back toward normal levels.Asked whether federal tax and spending policies were contributing to price growth, Mr. Powell pointed to a decline in federal spending from the height of the Covid-19 pandemic.“You have to look at the fiscal impulse from spending,” Mr. Powell said on Wednesday, referring to a measure of how much tax and spending policies are adding or subtracting to economic growth. “Fiscal impulse is actually not what’s driving inflation right now. It was at the beginning perhaps, but that’s not the story right now.”Instead, Mr. Powell — along with Mr. Biden and his advisers — says rapid price growth is primarily being driven by factors like snarled supply chains, an oil shock following Russia’s invasion of Ukraine and a shift among American consumers from spending money on services like travel and dining out to goods like furniture.Mr. Powell has also said the low unemployment rate was playing a role: “Some part of the high inflation that we’re experiencing is very likely related to an extremely tight labor market,” he told a House committee earlier this month.Increased consumer spending from savings could be pushing the cost of goods and services higher, White House economists said this week.Gabby Jones for The New York TimesBut the Fed chair’s position has not swayed congressional Republicans, who continue to press Mr. Biden to accept sharp spending reductions in exchange for raising the legal limit on how much the federal government can borrow.“Over the last two years, this administration’s reckless spending and failed economic policies have resulted in continued record inflation, soaring interest rates and an economy in a recessionary tailspin,” Representative Jodey C. Arrington, Republican of Texas and the chairman of the Budget Committee, said at a hearing on Thursday.Republicans have attacked Mr. Biden over inflation since he took office. They denounced the $1.9 trillion economic aid package he signed into law early in 2021 and warned it would stoke damaging inflation. Mr. Biden’s advisers largely dismissed those warnings. So did Mr. Powell and Fed officials, who were holding interest rates near zero and taking other steps at the time to stoke a faster recovery from the pandemic recession.Economists generally agree that those stimulus efforts — carried out by the Fed, by Mr. Biden and in trillions of dollars of pandemic spending signed by Mr. Trump in 2020 — helped push the inflation rate to its highest level in 40 years last year. But researchers disagree on how large that effect was, and over how to divide the blame between federal government stimulus and Fed stimulus..css-1v2n82w{max-width:600px;width:calc(100% – 40px);margin-top:20px;margin-bottom:25px;height:auto;margin-left:auto;margin-right:auto;font-family:nyt-franklin;color:var(–color-content-secondary,#363636);}@media only screen and (max-width:480px){.css-1v2n82w{margin-left:20px;margin-right:20px;}}@media only screen and (min-width:1024px){.css-1v2n82w{width:600px;}}.css-161d8zr{width:40px;margin-bottom:18px;text-align:left;margin-left:0;color:var(–color-content-primary,#121212);border:1px solid var(–color-content-primary,#121212);}@media only screen and (max-width:480px){.css-161d8zr{width:30px;margin-bottom:15px;}}.css-tjtq43{line-height:25px;}@media only screen and (max-width:480px){.css-tjtq43{line-height:24px;}}.css-x1k33h{font-family:nyt-cheltenham;font-size:19px;font-weight:700;line-height:25px;}.css-1hvpcve{font-size:17px;font-weight:300;line-height:25px;}.css-1hvpcve em{font-style:italic;}.css-1hvpcve strong{font-weight:bold;}.css-1hvpcve a{font-weight:500;color:var(–color-content-secondary,#363636);}.css-1c013uz{margin-top:18px;margin-bottom:22px;}@media only screen and (max-width:480px){.css-1c013uz{font-size:14px;margin-top:15px;margin-bottom:20px;}}.css-1c013uz a{color:var(–color-signal-editorial,#326891);-webkit-text-decoration:underline;text-decoration:underline;font-weight:500;font-size:16px;}@media only screen and (max-width:480px){.css-1c013uz a{font-size:13px;}}.css-1c013uz a:hover{-webkit-text-decoration:none;text-decoration:none;}How Times reporters cover politics. We rely on our journalists to be independent observers. So while Times staff members may vote, they are not allowed to endorse or campaign for candidates or political causes. This includes participating in marches or rallies in support of a movement or giving money to, or raising money for, any political candidate or election cause.Learn more about our process.One recent model, from researchers at the Federal Reserve Bank of New York, the University of Maryland and Harvard University, estimates that about a third of the inflation from December 2019 through June 2022 was caused by fiscal stimulus measures.Much of that stimulus has already made its way through the economy. Spending on pandemic aid to people, businesses and state and local governments fell sharply over the last year, as emergency programs signed into law by Mr. Biden and former President Donald J. Trump expired. The federal budget deficit fell to about $1.4 trillion in the 2022 fiscal year from about $2.8 trillion in 2021.House Speaker Kevin McCarthy and Representative Jodey Arrington have attacked the Biden administration’s spending policies.Haiyun Jiang/The New York TimesThe Hutchins Center at the Brookings Institution in Washington estimates that in the first quarter of 2021, when Mr. Biden’s economic aid bill delivered direct payments, enhanced unemployment checks and other benefits to millions of Americans, government fiscal policy added 8 percentage points to economic growth. At the end of last year, the center estimates, declining government spending was actually reducing economic growth by 1 percentage point.Still, even Biden administration officials say some effects of Mr. Biden’s — and Mr. Trump’s — stimulus bills could still be contributing to higher prices. That’s because Americans did not immediately spend all the money they got from the government in 2020 and 2021. They saved some of it, and now, some consumers are drawing on those savings to buy things.Increased consumer spending from savings could be pushing the cost of goods and services higher, White House economists conceded this week in their annual “Economic Report of the President,” which includes summaries of the past year’s developments in the economy.“If the drawdown of excess savings, together with current income, boosted aggregate demand, it could have contributed to high inflation in 2021 and 2022,” the report says.Some liberal economists contend consumer demand is currently playing little if any role in price growth — placing the blame on supply challenges or on companies taking advantage of their market power and the economic moment to extract higher prices from consumers.High prices “are not being driven by excess demand, but are actually being driven by things like a supply chain crisis or war in Ukraine or corporate profiteering,” said Rakeen Mabud, chief economist for the Groundwork Collaborative, a liberal policy organization in Washington.Other economists, though, say Mr. Biden and Congress could help the Fed’s inflation-fighting efforts by doing even more to reduce consumer demand and cool growth, either by raising taxes or reducing spending.Mr. Biden proposed a budget this month that would cut projected budget deficits by $3 trillion over the next decade, largely by raising taxes on high earners and corporations. Republicans refuse to raise taxes but are pushing for immediate cuts in government spending on health care, antipoverty measures and more, though they have not released a formal budget proposal yet. The Republican-controlled House voted this year to repeal some tax increases Mr. Biden signed into law last year, a move that could add modestly to inflation.Republican lawmakers have pushed Mr. Powell on whether he would welcome more congressional efforts to reduce the deficit and help bring inflation down. Mr. Powell rebuffed them.“We take fiscal policy as it comes to our front door, stick it in our model along with a million other things,” he said on Wednesday. “And we have responsibility for price stability. The Federal Reserve has the responsibility for that, and nothing is going to change that.” More

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    Why the Federal Reserve Won’t Commit

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    Facing huge economic uncertainty, the Fed is keeping its options open. Jerome H. Powell, its chair, will most likely continue that approach on Tuesday.Mark Carney, the former Bank of England governor, was once labeled the United Kingdom’s “unreliable boyfriend” because his institution had left markets confused about its intentions. Jerome H. Powell’s Federal Reserve circa 2023 could be accused of a related rap: fear of commitment.Mr. Powell’s Fed is in the process of raising interest rates to slow the economy and bring rapid inflation under control, and investors and households alike are trying to guess what the central bank will do in the months ahead, during a confusing economic moment. Growth, which was moderating, has recently shown signs of strength.Mr. Powell and his colleagues have been fuzzy about how they will respond. They have shown little appetite for speeding up rate increases again but have not fully ruled out the possibility of doing so. They have avoided laying out clear criteria for when the Fed will know it has raised interest rates to a sufficiently high level. And while they say rates will need to stay elevated for some time, they have been ambiguous about what factors will tell them how long is long enough.As with anyone who’s reluctant to define the relationship, there is a method to the Fed’s wily ways. At a vastly uncertain moment in the American economy, central bankers want to keep their options open.Strong consumer spending and inflation data have surprised economists.Hiroko Masuike/The New York TimesFed officials got burned in 2021. They communicated firm plans to leave interest rates low to bolster the economy for a long time, only to have the world change with the onset of rapid and wholly unexpected inflation. Policymakers couldn’t rapidly reverse course without causing upheaval — breakups take time, in monetary policy as in life. Thanks to the delay, the Fed spent 2022 racing to catch up with its new reality.This year, policymakers are retaining room to maneuver. That has become especially important in recent weeks, as strong consumer spending and inflation data have surprised economists and created a big, unanswered question: Is the pickup a blip being caused by unusually mild winter weather that has encouraged activities like shopping and construction, or is the economy reaccelerating in a way that will force the Fed to react?Mr. Powell will have a chance to explain how the central bank is thinking about the latest data, and how it might respond, when he testifies on Tuesday before the Senate Banking Committee and on Wednesday before the House Financial Services Committee. But while he will most likely face questions on the speed and scope of the Fed’s future policy changes, economists think he is unlikely to clearly commit to any one path.“The Fed is very much in data-dependent mode,” said Subadra Rajappa, the head of U.S. rates strategy at Société Générale. “We really don’t have a lot of clarity on the inflation dynamics.”Data dependence is a common central bank practice at fraught economic moments: Officials move carefully on a meeting-by-meeting basis to avoid making a mistake, like raising rates by more than is necessary and precipitating a painful recession. It’s the approach the Bank of England was embracing in 2014 when a member of Parliament likened it to a fickle date, “one day hot, one day cold.”Inflation F.A.Q.Card 1 of 5What is inflation? More

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    The Fed’s Preferred Inflation Gauge Sped Back Up

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    Inflation is down from its peak last summer, but recent readings have shown substantial and surprising staying power.There was a moment, late last year, when everything seemed to be going according to the Federal Reserve’s plan: Inflation was slowing, consumers were pulling back and the overheated economy was gently cooling down.But a spate of fresh data, including worrying figures released Friday, make it clear that the road ahead is likely to be bumpier and more treacherous than expected.The Personal Consumption Expenditures price index — the Fed’s preferred measure of inflation — climbed 5.4 percent in January from a year earlier, the Commerce Department said Friday. That was an unexpected re-acceleration from December’s 5.3 percent pace after six months of relatively consistent cooling.Even after stripping out food and fuel prices, both of which jump around a lot, the price index climbed 4.7 percent over the year through last month — also a pickup, and more than expected in a Bloomberg survey of economists.Those readings are well above the Fed’s goal of 2 percent annual inflation. And the report’s details offered other reasons to worry. The previously reported slowdown in December, which had given economists hope, looked less pronounced after revisions. While price increases had also been consistently slowing on a month-to-month basis, they, too, are now showing signs of speeding back up.Stocks slumped to their worst week of the year, with the S&P 500 down by 1.1 percent at the close of trading on Friday as investors digested the report and what it portends for the Fed, which has been raising rates aggressively since last year. Financial markets have come under sustained pressure in recent weeks as investors have recalibrated their expectations for how long inflation could remain high, and how high interest rates could go as a result.The figures released Friday are just the latest evidence that neither price increases nor the broader economy is cooling as much as expected as 2023 begins. Employers added half a million jobs in January, wages continue to rise, and figures released Friday showed that Americans continue to spend freely on goods and, especially, on services like vacation travel and restaurant meals.Inflation F.A.Q.Card 1 of 5What is inflation? More