Inflation keeps cooling
The Latest Inflationary Results from the Chicago Fed: An Empirical Study of the Service Sector and Predictions for the United States
Inflation cooled last month, thanks in part to falling gasoline prices, but the rising cost of services such as travel and restaurant meals continues to stretch people’s pocketbooks.
Prices rose 0.1% between February and March. Much of the increase is caused by the rising cost of shelter. Food prices were not up while energy prices were down.
The latest inflation reading comes three weeks before the Fed’s next policy meeting, where officials are widely expected to raise interest rates by another quarter percentage point.
The failure of two big regional banks last month complicated the efforts of the Fed to curb inflation.
That acts as an additional brake on the economy which increases the Fed’s own rate hikes. Fed policymakers will have to listen to the effects of tighter credit on interest rates.
“The Fed’s job is to be more paranoid than anyone else. The president of the Chicago Federal Reserve Bank said this week that they were paid for that. “In more interesting times, like the times we’re in right now, with wild shocks and financial stresses, it means we have to dig into loads of new information.”
The services sector, which was hit hard by the avian flu, has yet to adjust to a rapid rebound in demand, and is the reason why Goolsbee told the Economic Club of Chicago Tuesday that the most worrisome price hikes are in this area.
“The economy is still coming back from bizarro COVID times,” Goolsbee said. “Goods inflation has come down a lot,” he said. “But now services inflation, especially in the categories where spending is discretionary and was repressed for a few years — like travel, hotels, restaurants, leisure, recreation, entertainment — demand has returned and the inflation has proved particularly persistent.”
The service industries may be less responsive to inflationfighting actions by the Fed, which is sensitive to rising interest rates.
One encouraging sign for the Fed is that wages — an important factor in service prices — have cooled in recent months. Average wages in March were 4.2% higher than a year ago, compared to a 4.6% annual increase in February.
The latest inflation data suggests that the country is getting there — that an end to rapidly rising prices is perhaps becoming visible now. But the data is not clear enough to rule out a mirage.
Going forward, policymakers will probably try to take a balanced approach to match the mixed story. The Fed is likely to be more measured in its actions this year. The central bank usually increased rates by half a point or more for most of the year, but was able to do so only last month, and is expected to do so again in May.
The Fed did a lot of things in the first half of the 20th century, so there is a chance that it did too little. But there is also a risk that the Fed goes too far and does unnecessary damage to the economy, as this newsletter has explained before. A strong economy can lead to faster price increases. A weak economy can cause many people to be out of work. Policymakers are trying to find a sweet spot between those two extremes.
