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13 Sep
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Inflation Explained: The Good, the Bad and the Uncertain

Inflation in the United States has started to cool on an annual basis as a result of falling gas prices, but economists are looking for more evidence that the slowdown in price increases will become more widespread and pronounced.

So far, policymakers are receiving glimmers of good news, but the data remain far from conclusive.

Here are a few positive developments, a couple of worrying signs and a big, looming uncertainty that analysts will be paying close attention to in Tuesday’s Consumer Price Index data and in the months ahead.

  • Gas and other commodities. Falling prices at the gas pump have been pulling down annual inflation, and some food prices have also been easing, which could eventually seep through to retail prices. That’s good news for consumers, who tend to be sensitive to transportation and grocery costs. But for Federal Reserve officials, lower gas and food prices would be a welcome, but not decisive, development. Because those costs jump up and down, central bankers tend to look past them when trying to get a sense of where inflation is headed.

  • Cars and other physical products. A more meaningful positive development is taking place in goods prices, which are showing early signs of cooling off. Notably, price increases for used cars, which helped drive the pop in inflation that began last year, are beginning to pull back. Inflation for goods is slowing partly because consumers are shifting their spending away from products they snapped up during the pandemic and back toward services, like restaurant dinners and vacations. It is also partly because supply chain issues that have plagued producers for more than a year have shown signs of abating, though they are not back to normal.

  • Services tied to the labor market. Even as price increases for some goods ease, services prices — including the cost of eating out or hiring child care — have been picking up quickly. That could be poised to continue, because those prices are closely linked to wages, which have been climbing notably as a result of a strong job market with low unemployment and worker shortages that span many fields.

  • Rent. The single most important service category is rent-related costs, which count for nearly a third of overall inflation. For the time being, economists expect those housing costs to continue increasing sharply. There are too few apartments to go around, especially as renters shy away from buying homes amid rising mortgage rates. And a big run-up in rents over the past year is still slowly feeding into inflation.

  • War and disruption risk. Economists have repeatedly predicted that inflation was about to decelerate only to have those expectations scuppered. In fact, inflation did briefly recede last summer before rocketing back in the fall. With war in Ukraine still stoking uncertainty about supply chains and commodity markets, central bankers may be slow to declare victory on inflation. And even if price increases begin to pull back, a key question is: How much will inflation slow?

    “The bigger question for the Fed is not: ‘Has inflation peaked?’ It’s: ‘What’s the destination?’” said Aneta Markowska, the chief financial economist at Jefferies. She thinks that without a notable slowdown in economic growth, it will be difficult to get annual price gains back under 4 percent. That would be far higher than the 2 percent annual average that the Fed aims for.

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