WASHINGTON, Aug 14 (Reuters) – Pessimists watching the Federal Reserve battle inflation have focused on the so-called “last-mile” problem, convinced a full return to the U.S. central bank’s 2% inflation target will require a recession and significant job losses to cool ongoing price rises.
History is on their side, with academic studies and other research concluding the levels of inflation seen over the last two years can’t be fixed without a downturn, and prominent economists projecting a jump in the U.S. unemployment rate to between 5% and 10% from the current 3.5% – with millions out of work – might be the price that’s paid.
Reuters Graphics Reuters GraphicsAs a counterpoint, however, Brent Meyer, the Atlanta Fed’s assistant vice president and chief inflation watcher, suggests in a new analysis that the road to 2% inflation may in fact be smooth, rather than filled with the setbacks and difficult choices many Fed officials have said they expect.
It’s true that some of the main headline price measures have been sticky. The personal consumption expenditures price index stripped of food and energy was stuck in the comparatively high 4.6%-4.7% range for six months before finally falling in June to 4.1%, a fact some policymakers took as evidence the return to the Fed’s target would be slow.
But the annual headline numbers can mask developing trends, and Meyer said the just-released consumer price index report for July showed the breadth of inflation narrowing and its pace moderating in ways he felt could continue.
By his calculation, for example, a rising share of goods, currently about 18.3% of the CPI “basket,” is now in what he calls an inflation “sweet spot,” with prices increasing between 1% and 3%. Assuming that shelter cost inflation continues to fall, the share of goods where prices are rising more than 5%, presently about 38% of the basket, could be more than halved.
He added that inflation for services less energy and shelter costs, known as the “supercore” and an area of particular concern for the Fed, has by his calculation been increasing over the last three months at just a 2% annual rate. Since CPI inflation tends to be faster than the PCE measures that the Fed uses to set its inflation target, that means one important area of policymaker focus may have dipped below target already.
If that continues, “it’s possible that we could cover that last mile fairly quickly,” Meyer wrote.
RENTS TO THE RESCUE?
Meyer is not alone among economists who see some positive inflation trends in the making.
The cost of shelter, for example, accounts for about a third of the CPI, and after playing a central role in driving inflation higher early in the coronavirus pandemic it is now expected to help moderate it.
The behavior of the single-family housing market has in some ways beat expectations. Home price indices are rising after only a brief period of decline despite a jump in mortgage rates fueled by the Fed’s interest rate hikes since March 2022. The…
Source from www.reuters.com