Inflation (Economics)

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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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    Why Companies Are Pushing Premium Products With Higher Prices

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    Companies are trying to maintain fat profits as the economy changes, making “premiumization” their new favorite buzzword.Big companies are prodding their customers toward fancier, and often pricier, versions of everything from Krispy Kreme doughnuts to cans of WD-40.It’s evidence of the corporate world’s new favorite buzzword: “premiumization.”Businesses are hoping to keep the good times rolling after several years in which they seized on strong spending by consumers and rapid inflation to raise prices and pump up profit margins. Many firms are embracing offerings that cater to higher-income customers — people who are willing and able to pay more for products and services.One sign of the trend: the notion of premiumization was raised in nearly 60 earnings calls and investor meetings over the past three weeks.It is an indication of a changing economic backdrop. Inflation and consumer spending are expected to moderate this year, which could make it more difficult for firms to sustain large price increases without some justification.The premiumization trend also reflects a divide in the American economy. The top 40 percent of earners are sitting on more than a trillion dollars in extra savings amassed during the early part of the pandemic. Lower-income households, on the other hand, have been burning through their savings, partly as they contend with the higher costs of the food, rent and other necessities that make up a bigger chunk of their spending.“The pool of people willing to spend on small to large premium offers remains strong,” said David Mayer, a senior partner in the brand strategy practice of Lippincott, a consultancy.As products grow more expensive and exclusive, big swaths of the economy are at risk of becoming gentrified, raising the possibility that poorer consumers will be increasingly underserved.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Eurozone Inflation Edges Lower, but Pressure on Prices Continues

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    The annual rate of inflation was 8.5 percent in February, down from 8.6 percent a month earlier, among countries using the euro.With the winter drawing to a close, inflation levels eased in Europe last month, the European Commission reported on Thursday, even as concerns grew that stubbornly high prices could put pressure on central bankers to keep raising interest rates.Consumer prices in the 20 countries that use the euro as their currency rose at an annual rate of 8.5 percent in February, down slightly from January’s rate of 8.6 percent. Year-over-year rates have been declining since reaching a peak 10.6 percent in October.But some of the largest economies showed troubling increases, and core inflation — a measure that excludes the most erratic categories like food and energy — rose to a record high of 5.6 percent in February, from 5.3 percent.In France, inflation hit 7.2 percent in February, its highest point in more than two decades while in Spain, inflation grew at an annual rate of 6.1 percent. Germany, Europe’s largest economy, reported that the annual rate crept up to 9.3 percent.The grim economic outlook for Europe that had been predicted last fall has considerably brightened. Fears of a deep recession turned out to be overblown. Vertigo-inducing energy prices have dropped thanks in part to a warm winter and conservation efforts. Still, the road is bumpy.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

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    Fed Minutes Showed Policymakers Were Still Intent on Easing Inflation

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    Federal Reserve officials thought they needed to do more to cool the economy even before a series of strong data releases in recent weeks.Federal Reserve officials believed that they needed to do more to slow the economy and wrestle painfully rapid inflation back under control as of their meeting early this month, minutes from the gathering showed.The notes, released on Wednesday, showed that “all participants” continued to believe that rates needed to rise by more, and that “a number” of them thought that monetary policy might need to be even more restrictive in light of easing conditions in financial markets in the months prior.“Participants generally noted that upside risks to the inflation outlook remained a key factor shaping the policy outlook,” the minutes said. “A number of participants observed that a policy stance that proved to be insufficiently restrictive could halt recent progress in moderating inflationary pressures.”The takeaway is that policymakers were still intently focused on wrestling inflation back under control even before a spate of recent data releases showed that the economy has maintained a surprising amount of momentum at the start of 2023. In the weeks since the Fed last met, inflation data have exhibited unexpected staying power, and a range of data points have suggested that both the job market and consumer spending remain robust. A release on Friday is expected to show that the Fed’s preferred inflation indicator climbed rapidly on a monthly basis in January, and that consumption grew at a solid pace.That creates a challenge for Fed officials, who had been hoping that their policy changes last year would slowly but steadily weigh on the economy, cooling demand and forcing companies to stop raising prices so quickly. If demand holds up, businesses are more likely to find that they can continue to charge more without driving away their customers.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Inflation Cooled Just Slightly, With Worrying Details

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    WASHINGTON — Inflation has slowed from its painful 2022 peak but remains uncomfortably rapid, data released Tuesday showed, and the forces pushing prices higher are proving stubborn in ways that could make it difficult to wrestle cost increases back to the Federal Reserve’s goal.The Consumer Price Index climbed by 6.4 percent in January compared with a year earlier, faster than economists had forecast and only a slight slowdown from 6.5 percent in December. While the annual pace of increase has cooled from a peak of 9.1 percent in summer 2022, it remains more than three times as fast as was typical before the pandemic.And prices continued to increase rapidly on a monthly basis as a broad array of goods and services, including apparel, groceries, hotel rooms and rent, became more expensive. That was true even after stripping out volatile food and fuel costs.Taken as a whole, the data underlined that while the Federal Reserve has been receiving positive news that inflation is no longer accelerating relentlessly, it could be a long and bumpy road back to the 2 percent annual price gains that used to be normal. Prices for everyday purchases are still climbing at a pace that risks chipping away at economic security for many households.“We’re certainly down from the peak of inflation pressures last year, but we’re lingering at an elevated rate,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “The road back to 2 percent is going to take some time.”Stock prices sank in the hours after the report, and market expectations that the Fed will raise interest rates above 5 percent in the coming months increased slightly. Central bankers have already lifted borrowing costs from near zero a year ago to above 4.5 percent, a rapid-fire adjustment meant to slow consumer and business demand in a bid to wrestle price increases under control.Moderating price increases for goods and commodities have driven the overall inflation slowdown in recent months.Casey Steffens for The New York TimesBut the economy has so far held up in the face of the central bank’s campaign to slow it down. Growth did cool last year, with the rate-sensitive housing market pulling back and demand for big purchases like cars waning, but the job market has remained strong and wages are still climbing robustly.That could help to keep the economy chugging along into 2023. Consumption overall had shown signs of slowing meaningfully, but it may be poised for a comeback. Economists expect retail sales data scheduled for release on Wednesday to show that spending climbed 2 percent in January after falling 1.1 percent in December, based on estimates in a Bloomberg survey.Signs of continued economic momentum could combine with incoming price data to convince the Fed that it needs to do more to bring inflation fully under control, which could entail pushing rates higher than expected or leaving them elevated for longer. Central bankers have been warning that the process of wrangling cost increases might prove bumpy and difficult.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    What Recession? Some Economists See Chances of a Growth Rebound.

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    The Federal Reserve has raised rates rapidly. But instead of cracking, some data point to an economy that’s thriving.Many economists and investors had a clear narrative coming into 2023: The Federal Reserve had spent months pushing borrowing costs rapidly higher in a bid to tame inflation, and those moves were expected to slow growth and the labor market so much that the economy would be at risk of plunging into a downturn.But the recession calls are now getting a rethink.Employers added more than half a million jobs in January, the housing market shows signs of stabilizing or even picking back up, and many Wall Street economists have marked down the odds of a downturn this year. After months of asking whether the Fed could pull off a soft landing in which the economy slows but does not plummet into a bruising recession, analysts are raising the possibility that it will not land at all — that growth will simply hold up.Not every data point looks sunny: Manufacturing remains glum, consumer spending has been cracking, and some analysts still think a mild recession this year remains likely. But there have been enough surprises pointing to continued momentum that Fed officials themselves seem to see a better chance that the nation will avoid a painful downturn. That resilience could even be a problem.While a gentle landing would be a welcome development, economists are beginning to ask whether growth and the job market will run too warm for inflation to slow as much as central bankers are hoping — eventually forcing the Fed to respond more aggressively.“They should be worried about how strong the U.S. labor market is,” said Ajay Rajadhyaksha, the global chairman of research at Barclays. “So far, the U.S. economy has proved unexpectedly resilient.”The Fed has lifted rates from near zero early last year to above 4.5 percent as of last week — the fastest series of policy adjustment in decades. Those higher borrowing costs have translated into pricier car loans and mortgages, and for a while they seemed to be clearly slowing the economy.But as the central bank has shifted toward a more moderate pace of rate moves — it slowed the speed of its increases first in December, then again this month — markets have relaxed. Rates on mortgages, for example, have come down slightly.That’s showing up in the economy. Mortgage applications have been bouncing around, but in general they have ticked back up. New home sales are now hovering around the same level as before the pandemic. Used car prices had been declining, but they have begun to rise at a wholesale level — which some economists see as a response to some returning demand for those vehicles.And while retail sales and other measures of household spending have been pulling back, according to recent data, several nascent forces could help to shore up consumer demand into 2023 — with potentially big implications for the Fed’s battle against inflation.Jerome H. Powell, the Fed chair, said some of the drag on inflation from goods could be “transitory,” meaning that it will fade away.Lexey Swall for The New York TimesSocial Security recipients just received a sizable cost-of-living adjustment in their first check of 2023, putting more money in the pockets of older Americans. More than a dozen states, including Virginia, California, New York and Massachusetts, sent tax rebates or stimulus checks late last year. And while Americans have been working their way through the excess savings that were amassed during the early pandemic, many still have some cushion left.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    As Biden Prepares to Tout Economy, Fed Chair Powell Takes a Cautious Tone

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    The White House has embraced signs that the economy is strong. For the Fed, that strength could prolong its fight against inflation.WASHINGTON — Jerome H. Powell, the chair of the Federal Reserve, underscored that the central bank has more work to do when it comes to slowing the economy and that officials remain determined to wrestle rapid inflation under control, even if that means pushing rates higher than expected.Mr. Powell, speaking on Tuesday in a question-and-answer session at the Economic Club of Washington, D.C., called a recent slowdown in price increases “the very early stages of disinflation.” He added that the process of getting inflation back to normal was likely to be bumpy.“There has been an expectation that it will go away quickly and painlessly — and I don’t think that’s at all guaranteed; that’s not the base case,” Mr. Powell said. “The base case for me is that it will take some time, and we’ll have to do more rate increases, and then we’ll have to look around and see whether we’ve done enough.”The Fed chair’s comments came hours before President Biden delivered the annual State of the Union address, which offered a contrasting tone.Democrats are embracing a historically strong economy with super-low unemployment and rapid wage growth, cheering a report last week that showed employers added more than half a million jobs in January. But Fed officials have met the news with more caution. The central bank is supposed to foster both full employment and stable inflation, and policymakers have been concerned that the strength of today’s job market could make it harder for them to return wage and price increases to historically normal levels.Mr. Powell said that the Fed had not expected the jobs report to be so strong, and that the robustness reinforced why the process of lowering inflation “takes a significant period of time.”While he said it was good that the disinflation so far had not come at the expense of the labor market, he also underscored that further interest rate moves would be appropriate and that borrowing costs would need to remain high for some time. And he embraced how markets have adjusted in the wake of the strong hiring numbers: Investors had previously expected the Fed to stop adjusting policy very soon, but now see rate increases in both March and May.The biggest inflation challenge facing the Fed is in the services sector of the economy, which includes restaurants, travel and health care.Jim Wilson/The New York Times“We anticipate that ongoing rate increases will be appropriate,” Mr. Powell said. He said that in the wake of the jobs report, financial conditions were “more well aligned” with that view than they had been previously.To try to slow the economy and choke off inflation, policymakers raised interest rates from near zero early last year to more than 4.5 percent at their last meeting, the quickest pace of adjustment in decades. Higher borrowing costs weigh on demand by making it more expensive to fund big purchases or business expansions. That in turn tempers hiring and wage growth, with further cools the economy. Inflation F.A.Q.Card 1 of 5What is inflation? More