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3 Facts That Help Explain a Confusing Economic Moment

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3 Facts That Help Explain a Confusing Economic Moment

The path to a “soft landing” doesn’t seem as smooth as it did four months ago. But the expectations of a year ago have been surpassed.April 13, 2024The economic news of the past two weeks has been enough to leave even seasoned observers feeling whipsawed. The unemployment rate fell. Inflation rose. The stock market plunged, then rebounded, then dropped again.Take a step back, however, and the picture comes into sharper focus.Compared with the outlook in December, when the economy seemed to be on a glide path to a surprisingly smooth “soft landing,” the recent news has been disappointing. Inflation has proved more stubborn than hoped. Interest rates are likely to stay at their current level, the highest in decades, at least into the summer, if not into next year.Shift the comparison point back just a bit, however, to the beginning of last year, and the story changes. Back then, forecasters were widely predicting a recession, convinced that the Federal Reserve’s efforts to control inflation would inevitably result in job losses, bankruptcies and foreclosures. And yet inflation, even accounting for its recent hiccups, has cooled significantly, while the rest of the economy has so far escaped significant damage.“It seems churlish to complain about where we are right now,” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution. “This has been a really remarkably painless slowdown given what we all worried about.”The monthly gyrations in consumer prices, job growth and other indicators matter intensely to investors, for whom every hundredth of a percentage point in Treasury yields can affect billions of dollars in trades.But for pretty much everyone else, what matters is the somewhat longer run. And from that perspective, the economic outlook has shifted in some subtle but important ways.

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Change in prices from a year earlier in select categories
Notes: “Groceries” chart shows price index for food at home. “Furniture” includes bedding.Source: Bureau of Labor StatisticsBy The New York Times

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The unemployment rate
Source: Bureau of Labor StatisticsBy The New York Times

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The federal funds target rate
Note: The rate since December 2008 is the upper limit of the federal funds target range.Source: The Federal ReserveBy The New York TimesWe are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Email ‘Mistake’ on Inflation Data Prompts Questions on What Is Shared

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    Traders are closely watching once-obscure economic data, prompting more scrutiny of how widely the government distributes the information.One afternoon in late February, an employee at the Bureau of Labor Statistics sent an email about an obscure detail in the way the government calculates inflation — and set off an unlikely firestorm.Economists on Wall Street had spent two weeks puzzling over an unexpected jump in housing costs in the Consumer Price Index. Several had contacted the Bureau of Labor Statistics, which produces the numbers, to inquire. Now, an economist inside the bureau thought he had solved the mystery.In an email addressed to “Super Users,” the economist explained a technical change in the calculation of the housing figures. Then, departing from the bureaucratic language typically used by statistical agencies, he added, “All of you searching for the source of the divergence have found it.”To the inflation obsessives who received the email — and other forecasters who quickly heard about it — the implication was clear: The pop in housing prices in January might have been not a fluke but rather a result of a shift in methodology that could keep inflation elevated longer than economists and Federal Reserve officials had expected. That could, in turn, make the Fed more cautious about cutting interest rates.“I nearly fell off my chair when I saw that,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, a forecasting firm.Huge swaths of Wall Street trade securities are tied to inflation or rates. But the universe of people receiving the email was tiny — about 50 people, the Bureau of Labor Statistics later said.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Auto Insurance Spike Hampers the Inflation Fight

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    Costlier vehicles and repairs are pushing premiums higher even as the increase in U.S. consumer prices is tapering overall.Job growth, wage growth and business growth are all lively, and inflation has steeply fallen from its 2022 highs. But consumer sentiment, while improving, is still sour.One reason may be sticker shock from some highly visible prices — even as overall inflation has calmed. The cost of car insurance is a key example.Motor vehicle insurance rose 1.4 percent on a monthly basis in January alone and has risen 20.6 percent over the past year, the largest jump since 1976. It has been a huge hit for those driving the roughly 272 million private and commercial vehicles registered in the country. And it has played a part in dampening the “mission accomplished” mood on inflation that was bubbling up in markets at the beginning of the year.According to a recent private-sector estimate, the average annual premium for full-coverage car insurance in 2024 is $2,543, compared with $2,014 in 2023 and $1,771 in 2022.That spike has a variety of causes, but the central one is straightforward: Cars and trucks are pricier now, so insurance for them is, too.The annual change in the cost of car insurance

    Note: Data is the year-over-year percentage change in motor vehicle insurance per the U.S. city average, not seasonally adjusted.Source: U.S. Bureau of Labor StatisticsBy The New York TimesWe are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Housing Costs Are Running Hot, but Is the Data Missing a Cooling Trend?

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    Pandemic disruptions may have muddled the measurement of home prices in inflation data. That could complicate the Fed’s course on interest rates.The Federal Reserve may have a housing problem. At the very least, it has a housing riddle.Overall inflation has eased substantially over the past year. But housing has proved a tenacious — and surprising — exception. The cost of shelter was up 6 percent in January from a year earlier, and rose faster on a monthly basis than in December, according to the Labor Department. That acceleration was a big reason for the pickup in overall consumer prices last month.Listen to This ArticleOpen this article in the New York Times Audio app on iOS.The persistence of housing inflation poses a problem for Fed officials as they consider when to roll back interest rates. Housing is by far the biggest monthly expense for most families, which means it weighs heavily on inflation calculations. Unless housing costs cool, it will be hard for inflation as a whole to return sustainably to the central bank’s target of 2 percent.“If you want to know where inflation is going, you need to know where housing inflation is going,” said Mark Franceski, managing director at Zelman & Associates, a housing research firm. Housing inflation, he added, “is not slowing at the rate that we expected or anyone expected.”Those expectations were based on private-sector data from real estate websites like Zillow and Apartment List and other private companies showing that rents have barely been rising recently and have been falling outright in some markets.For home buyers, the combination of rising prices and high interest rates has made housing increasingly unaffordable. Many existing homeowners, on the other hand, have been partly insulated from rising prices because they have fixed-rate mortgages with payments that don’t change from month to month.The Housing ConundrumHousing costs, as measured in the Consumer Price Index, are still rising faster than before the pandemic, even as overall inflation has eased.

    Source: Labor DepartmentBy The New York TimesA Wider GapAfter surging in 2021 and 2022, rent growth has moderated. But the slowdown has been more gradual for single-family homes than for apartments.

    Notes: Data is shown as a 12-month change in a three-month moving average. “Houses” include both attached and detached single-family homes.Source: ZillowBy The New York TimesWe are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Will America’s Good News on Inflation Last?

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    One of the biggest economic surprises of 2023 was how quickly inflation faded. A dig into the details offers hints at whether it will last into 2024.Prices climbed rapidly in 2021 and 2022, straining American household budgets and chipping away at President Biden’s approval rating. But inflation cooled in late 2023, a spurt of progress that happened more quickly than economists had expected and that stoked hopes of a gentle economic landing.Now, the question is whether the good news can persist into 2024.As forecasters try to guess what will happen next, many are looking closely at where the recent slowdown has come from. The details suggest that a combination of weaker goods prices — things like apparel and used cars — and moderating costs for services including travel has helped to drive the cooldown, even as rent increases take time to fade.Taken together, the trends suggest that more disinflation could be in store, but they also hint that a few lingering risks loom. Below is a rundown of the big changes to watch.What we’re talking about when we talk about disinflation.What’s happening in America right now is what economists call “disinflation”: When you compare prices today with prices a year ago, the pace of increase has slowed notably. At their peak in the summer of 2022, consumer prices were increasing at a 9.1 percent yearly pace. As of November, it was just 3.1 percent.Still, disinflation does not mean that prices are falling outright. Price levels have generally not reversed the big run-up that happened just after the pandemic. That means things like rent, car repairs and groceries remain more expensive on paper than they were in 2019. (Wages have also been climbing, and have picked up more quickly than prices in recent months.) In short, prices are still climbing, just not as quickly.What inflation rate are officials aiming for?The Federal Reserve, which is responsible for trying to restore price stability, wants to return price increases to a slow and steady pace that is consistent with a sustainable economy over time. Like other central banks around the world, the Fed defines that as a 2 percent annual inflation rate. What caused the 2023 disinflation surprise?Inflation shocked economists in 2021 and 2022 by first shooting up sharply and then remaining elevated. But starting in mid-2023, it began to swing in the opposite direction, falling faster than widely predicted.As of the middle of last year, Fed officials expected a key measure of inflation — the Personal Consumption Expenditures measure — to end the year at 3.2 percent. As of the latest data released in November, it had instead faded to a more modest 2.6 percent. The more timely Consumer Price Index measure has also been coming down swiftly.The surprisingly quick cooldown started as travel prices began to decelerate, said Omair Sharif, founder of Inflation Insights. When it came to airfares in particular, the story was supply.Demand was still strong, but after years of limited capacity, available flights and seats had finally caught up. That combined with cheaper jet fuel to send fares lower. And while other travel-related service prices like hotel room rates jumped rapidly in 2022, they were increasing much more slowly by mid-2023.Travel inflation is returning to normalHotel price increases look much as they did before the pandemic, while airfares have recently fallen.

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    Year-over-year percentage change in Consumer Price Index categories
    Source: Bureau of Labor StatisticsBy The New York TimesThe next change that lowered inflation came from goods prices. After jumping for two years, prices for products like furniture, apparel and used cars began to climb much more slowly — or even to fall.The amount of disinflation coming from goods was surprising, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. And, encouragingly, “it was reasonably broad-based.”Used car deflation is backUsed vehicle prices fell in 2023. New car prices have been climbing, but more slowly than in 2022.

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    Year-over-year percentage change in Consumer Price Index categories
    Source: Bureau of Labor StatisticsBy The New York TimesThe inflation relief came partly from supply improvements. For years, snarled transit routes, expensive shipping fares and a limited supply of workers had limited how many products and services companies could offer. But by late last year, shipping routes were operating normally, pilots and flight crews were in the skies, and car companies were churning out new vehicles.“The supply side is at work,” said Skanda Amarnath, executive director at the worker-focused research group Employ America.What could be the next shoe to drop?In fact, one source of long-awaited disinflation has yet to show up fully: a slowdown in rental inflation.Private-sector data tracking new rents soared early in the pandemic but then slowed sharply. Many economists think that pullback will eventually feed into official inflation data as renters renew their leases or start new ones — but the process is taking time.Housing inflation remains faster than normalRent increases and a measure that approximates the cost of owned housing are both slowing only gradually.

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    Year-over-year percentage change in Consumer Price Index categories
    Source: Bureau of Labor StatisticsBy The New York Times“We’re likely to see more moderation in rent,” said Laura Rosner-Warburton, senior economist and founding partner at MacroPolicy Perspectives. Because a bigger rent cooldown remains possible and goods price increases could keep slowing, many economists expect overall consumer price inflation to fall closer to the Fed’s goal by the end of 2024. There is even a risk that it could slip below 2 percent, some think.“It’s a scenario that deserves some discussion,” Ms. Rosner-Warburton said. “I don’t think it’s the most likely scenario, but the risks are more balanced.”What could go wrong?Of course, that does not mean Fed officials and the American economy are entirely out of the woods. Falling gas prices have been helping to pull inflation lower both overall and by feeding into other prices, like airfares. But fuel prices are notoriously fickle. If unrest in gas-producing regions causes energy costs to jump unexpectedly, stamping inflation out will become more difficult.Geopolitics also carry another inflation risk: Attacks against merchant ships in the Red Sea are messing with a key transit route for global commerce, for instance. If such problems last and worsen, they could eventually feed into higher prices for goods.And perhaps the most immediate risk is that the big inflation slowdown toward the end of 2023 could have been overstated. In recent years, end-of-year price figures have been revised up and January inflation data have come in on the warm side, partly because some companies raise prices at the beginning of the new year.“There is a bunch of choppiness coming,” Mr. Sharif said. He said he’ll closely watch a set of inflation recalculations slated for release on Feb. 9, which should give policymakers a clearer view of whether the recent slowdown has been as notable as it looks.But Mr. Sharif said the overall takeaway was that inflation looked poised to continue its moderation.That could help to pave the path for lower interest rates from the Fed, which has projected that it could lower borrowing costs several times in 2024 after raising them to the highest level in more than 22 years in a bid to cool the economy and wrestle inflation under control.“There’s not a lot of upside risk left, in my mind,” Mr. Sharif said. More

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    Inflation Holds Roughly Steady Ahead of Fed Meeting

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    Consumer prices rose 3.1 percent in the year through November, and a closely watched core index was roughly the same rate as the previous month.Inflation data released on Tuesday showed that price increases remained moderate in November, the latest sign that inflation has cooled substantially from its June 2022 peak. That’s likely to keep the Federal Reserve on track to leave interest rates unchanged at its final meeting of the year, which takes place this week.The Consumer Price Index came out just hours before the Fed began its two-day gathering, which will conclude with the release of an interest rate decision and a fresh set of quarterly economic projections at 2 p.m. on Wednesday. Jerome H. Powell, the Fed chair, is then scheduled to hold a news conference.Central bankers have embraced a recent slowdown in price increases, and Tuesday’s data largely suggested that inflation remains lower than earlier this year. Overall inflation climbed 0.1 percent on a monthly basis, making for a 3.1 percent increase compared to a year earlier.That was cooler than 3.2 percent in October, and it is down notably from a peak above 9 percent in the summer of 2022.But some of the report’s underlying details could keep Fed officials wary as they contemplate what to do next with interest rates. Investors expect central bankers to begin lowering borrowing costs within the first half of 2024, though officials have been trying to keep their options open.After stripping out volatile food and fuel to give a clearer sense of underlying inflation trends, so-called core inflation climbed more quickly on a monthly basis. And a closely watched measure that tracks housing expenses also climbed more quickly; that measure is called “owners’ equivalent rent” because it estimates how much it would cost someone to rent a home that they own, and economists have been expecting it to decline.“It reinforces this idea that it’s going to be a bumpy road to disinflation,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “The Fed cannot cut interest rates too soon in the face of resilient services inflation.”Core inflation was up by 4 percent compared to a year earlier, holding steady from October. That pace remains well above the roughly 2 percent pace that was normal before the onset of the pandemic. More

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    Inflation Slowdown Remains Bumpy, September Consumer Price Data Shows

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    Prices are rising at a pace that is much less rapid than in 2022, but signs of stalling progress are likely to keep Federal Reserve officials wary.Consumer prices grew at the same pace in September as they had in August, a report released on Thursday showed. The data contained evidence that the path toward fully wrangling inflation remains a long and bumpy one.The Consumer Price Index climbed 3.7 percent from a year earlier. That matched the August reading, and it was slightly higher than the 3.6 percent that economists had predicted.The report did contain some optimistic details. After cutting out food and fuel prices, both of which jump around a lot, a “core” measure that tries to gauge underlying price trends climbed 4.1 percent, which matched what economists had expected and was down from 4.3 percent previously. And inflation is still running at a pace that is much less rapid than in 2022 or even earlier this year.Even so, several signs in the report suggested that recent progress toward slower price increases may be stalling out — and that could help to keep officials at the Federal Reserve wary.The S&P 500 fell 0.6 percent and the yield on 10-year Treasuries rose on Thursday to 4.7 percent, as investors worried that September’s inflation report showed less progress than they had hoped for, both in rents and a measure of inflation that strips out volatile goods and services.Fed policymakers have been raising interest rates in an effort to slow economic growth and wrestle inflation under control. They have already lifted borrowing costs to a range of 5.25 to 5.5 percent, up sharply from near-zero 19 months ago. Now, they are debating whether one final rate move is needed.Given the fresh inflation data, economists predict that policymakers are likely to keep the door open to that additional rate increase until they can be more confident that they are well on their way to winning the battle against rising prices. Inflation has begun to flag, but the September data served as a reminder that it is not yet clearly vanquished.“This report still suggests that we have stepped out of the higher inflation regime,” said Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives. Still, “we’re not out of the woods — there are still some sticky corners of inflation.” More

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    U.S. Government Shutdown Could Delay Key Economic Data

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    A lapse in funding would delay data on unemployment and inflation as policymakers try to avoid a recession.A federal government shutdown would cut off access to key data on unemployment, inflation and spending just as policymakers are trying to guide the economy to a “soft landing” and avoid a recession.Federal statistical agencies, including the Bureau of Labor Statistics, the Census Bureau and the Bureau of Economic Analysis, will suspend operations unless Congress reaches a deal before Sunday to fund the government. Even a short shutdown would probably delay high-profile data releases — including the monthly jobs report, scheduled for Oct. 6, and the Consumer Price Index, scheduled for Oct. 12.This isn’t the first time government shutdowns have threatened economic data. The 16-day lapse in funding in 2013 delayed dozens of releases, including the September employment report. A longer but less extensive shutdown in 2018 and 2019 spared the Bureau of Labor Statistics but held up reports from the Commerce Department, including data on gross domestic product.But this shutdown, if it occurs, comes at a particularly sensitive time for the economy. Policymakers at the Federal Reserve have been trying to tame inflation without causing a recession — a balancing act that requires central bankers to fine tune their strategy based on how the economy responds.“Monetary policy, even in normal times, is a complicated undertaking — we are not in a normal time now,” said David Wilcox, a longtime Fed staff member who is now an economist at the Peterson Institute for International Economics and Bloomberg Economics. “It’s not a good strategy to take a task that is so difficult and make it harder by restricting the information flow to monetary policymakers at this delicate moment.”A short shutdown, similar to the one a decade ago, would delay data releases but probably wouldn’t do much longer-term damage. Data for the September jobs report, for example, has already been collected; it would take government statisticians only a few days to finish the report and release it after the government reopened. In that situation, most major statistics would probably be updated by the time the Fed next meets on Oct. 31 and Nov. 1.But the longer a shutdown goes on, the more lasting the potential damage. Labor force statistics, for example, are based on a survey conducted in the middle of each month — if the government doesn’t reopen in time to conduct the October survey on schedule, the resulting data could be less accurate, as respondents struggle to recall what they were doing weeks earlier. Other data, such as information on consumer prices, could be all but impossible to recover after the fact.“If we miss two months of collecting data, we’re never getting that back,” said Betsey Stevenson, a University of Michigan economist who was a member of President Barack Obama’s Council of Economic Advisers during the 2013 shutdown. “This thing gets more and more and more problematic as the duration goes on.”A longer shutdown would also increase the risk that policymakers misread the economy and make a mistake — perhaps by failing to detect a reacceleration in inflation, or by missing signs that the economy is slipping into a recession.“The thought of the Fed trying to make such an important, critical decision without big pieces of information is just downright terrifying,” said Ben Harris, who was a top official at the Treasury Department until early this year and is now at the Brookings Institution. “It’s like a pilot trying to land a plane without knowing what the runway looks like.”Policymakers wouldn’t be flying completely blind. The Fed, which operates independently and would not be affected by the shutdown, would continue to publish its own data on industrial production, consumer credit and other subjects. And private-sector data providers have expanded significantly in both breadth and quality in recent years, offering alternative sources of information on job openings, employment, wages and consumer spending.“The Fed has always done what it can to gather information from other sources, but now there are more of those sources it can turn to,” said Erica Groshen, a Cornell University economist who served as commissioner of the Bureau of Labor Statistics during the 2013 shutdown. “That will make the very data-dependent parts of the policy world and the business community a little less bereft of timely data.”Still, Ms. Groshen said, private data cannot match the breadth, transparency and reliability of official statistics. She recalled that in 2013, Fed officials contacted her department to see if the central bank could provide funding to get the jobs report out on time — a proposal that administration officials ultimately concluded would be illegal.Policymakers aren’t the only ones who will be affected by the lack of data. Trucking companies base fuel surcharges on diesel prices published by the Energy Information Administration. Inventory and sales data from the Census Bureau can influence businesses’ decisions on when to place orders. And the Social Security Administration can’t settle on the annual cost-of-living increase in benefits without October consumer price data. More

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    The Fed’s Preferred Inflation Gauge Ticked Up in July

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    Overall inflation climbed to 3.3 percent, from 3 percent previously, underscoring the Fed’s long road back to 2 percent price increases.The Federal Reserve has warned for months that wrestling rapid inflation back to a normal pace was likely to be a bumpy process, a reality underscored by fresh data on Thursday that showed a closely watched inflation gauge picking back up in July.The Personal Consumption Expenditures index climbed 3.3 percent in the year through July, up from 3 percent in the previous reading. While that is down from a peak last summer of 7 percent, it is still well above the 2 percent growth rate that the Fed targets.Central bankers tend to more closely monitor a measure of core inflation that strips out volatile food and fuel prices to give a clearer sense of the underlying price trend. That measure also climbed, touching 4.2 percent after 4.1 percent the previous month.Inflation is expected to slow later this year and into 2024, so Thursday’s report marks a bump in the road rather than a reversal of recent progress toward cooler prices. But as inflation figures bounce around, Fed officials have been hesitant to declare victory.Their wariness has only been reinforced by other recent economic data, which has shown that the economy retains a surprising amount of momentum after a year and half in which Fed policymakers have ratcheted up interest rates. The Fed’s policy rate is now set at 5.25 to 5.5 percent, up from near-zero in March 2022, which is making it more expensive to borrow to buy a house or car or to expand a business.Despite that, the job market has remained strong and consumers continue to shop. An employment report set for release on Friday is expected to show that while businesses added fewer jobs in August, the unemployment rate remained very low at 3.5 percent. And fresh consumption data released Thursday showed that Americans continued to open their wallets: Personal spending climbed by 0.8 percent in July from the month before, more than economists expected and a solid pace. Even after adjusting for inflation, it was up 0.6 percent, a pop from 0.4 percent in the previous report.The tick higher in P.C.E. inflation was widely expected: Various data points that feed into the number, including the Consumer Price Index inflation report, come out earlier in the month. Even so, the measure remains a point of focus on Wall Street and in policy circles because it is the one the Fed uses to define its official inflation goal.Fed officials will be watching data over the next few weeks as they consider what to do with interest rates at their meeting on Sept. 20. Policymakers have said that the meeting is a “live” one, meaning that they could either lift interest rates or keep them on hold, but several have suggested that at this point they feel that they can be patient in making a move.“Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” Jerome H. Powell, the Fed chair, said in a high-profile speech last week.Many investors do anticipate a final rate increase later this year, but later on — perhaps at the central bank’s November gathering. And even if the Fed does not lift borrowing costs in a few weeks, policymakers will release a fresh set of economic projections that will show both whether they expect to nudge rates higher and by how much they expect inflation to slow both by the end of 2023 and into 2024. More