Yazılar

Why Inflation May Seem to Be Easing but Remains a Significant Problem

/in /tarafından

Although the Federal Reserve appears to be closing in on its inflation target, the ongoing high cost of goods and services continues to strain the U.S. economy. While recent data shows inflation slowing, the effects of price increases are still evident, causing challenges for individuals, businesses, and policymakers.

Some economists, such as those at Goldman Sachs, predict that upcoming reports may indicate the inflation rate approaching the Fed’s 2% target. However, inflation is a complex issue, not easily encapsulated by a single metric. By some measures, inflation remains uncomfortably high for many Americans and even some Fed officials. San Francisco Fed President Mary Daly recently acknowledged the progress in lowering inflation but warned against complacency, emphasizing that vigilance is still necessary.

Inflation is far from over. Daly’s anecdote about a local resident asking her if the Fed had “declared victory” highlights the public’s concern. The central bank’s recent decision to cut interest rates was aimed at adjusting policy in response to inflation, which has come down from its 2022 peak. Yet, many Americans remain skeptical, as high prices linger in various sectors.

There are two ways to assess inflation: the 12-month inflation rate, which receives most of the attention, and the cumulative impact that inflation has had over the past three years. The Consumer Price Index (CPI), one of the most widely followed indicators, has shown a dramatic improvement, with inflation at 2.4% in September, down from a peak of 9.1% in June 2022. However, other indicators show a less promising picture. For example, the Fed’s preferred measure, the Personal Consumption Expenditures (PCE) price index, is still slightly above the 2% target, according to projections.

Inflation first surpassed the Fed’s 2% goal in March 2021 and was initially considered a “transitory” phenomenon linked to pandemic-related disruptions. Yet, over the past two years, prices have skyrocketed across many sectors. Since the start of the inflation surge, the all-items CPI has risen 18.8%, food prices have jumped 22%, and the cost of everyday necessities like eggs and gasoline have climbed sharply. Housing prices, too, have surged, with the median home price increasing 16% since early 2021.

Furthermore, “sticky” prices—those less likely to change frequently, such as rents, insurance, and medical costs—are still rising at a 4% rate, even as more flexible items like food and gas show signs of easing. This divergence between different inflation measures highlights the complexity of the issue.

Core inflation, which excludes food and energy, continues to be a concern as well. In September, core CPI inflation stood at 3.3%, while the core PCE index was 2.7% in August. These figures suggest that despite some improvement, underlying inflation pressures remain.

Consumer spending has remained strong despite high prices. In the second quarter of 2024, consumer spending reached nearly $20 trillion on an annualized basis, though the pace of spending is beginning to slow. Borrowing has also increased significantly as households have taken on more debt to cope with rising costs. Household debt rose 19% since early 2021, with delinquencies on the rise, though still below historical averages.

Small businesses are also feeling the strain. Many have turned to credit cards to manage cash flow, with small business credit card balances increasing by more than 20% compared to pre-pandemic levels. Inflation remains the top concern for many business owners, as seen in surveys conducted by organizations like the National Federation of Independent Business.

As the Fed prepares for its next policy meeting in November, it faces a difficult choice. While interest rates have been reduced, financial markets are reacting unpredictably, with bond yields rising and mortgage rates climbing despite the Fed’s easing efforts. Some economists argue that the Fed should hold off on further rate cuts until it can better assess the current inflationary environment.

In the end, the public remains uncertain about whether the Fed has truly tamed inflation. As Daly noted, while progress is being made, the journey toward stabilizing prices and achieving lasting economic relief is far from over.

 

UK Inflation Falls Sharply to 1.7%, Below Bank of England’s Target for First Time in Over Three Years

/in /tarafından

Inflation in the United Kingdom dropped sharply to 1.7% in September, marking the first time since April 2021 that inflation has fallen below the Bank of England’s (BOE) 2% target. The Office for National Statistics (ONS) announced the drop on Wednesday, surprising markets as economists had expected a higher inflation rate of 1.9% for the month. The fall from 2.2% in August to 1.7% in September has now intensified speculation about a potential rate cut by the BOE in November.

Core and Services Inflation Drop

Core inflation, which excludes volatile components like energy, food, alcohol, and tobacco, also fell from 3.6% in August to 3.2% in September, lower than the 3.4% forecast. Meanwhile, inflation in the services sector, a key driver of the UK economy, eased to 4.9% from 5.6%, its lowest rate since May 2022.

These declines in core and services inflation are crucial for the BOE as it assesses whether to adjust interest rates further. A reduction in services inflation, in particular, suggests that underlying price pressures are starting to ease, providing the BOE with more flexibility.

Rate Cuts Anticipated

Following the publication of these inflation figures, market expectations for a 25-basis-point rate cut in November surged to 92%, up from 80%. Analysts are also pricing in a likely follow-up rate cut in December. If the BOE proceeds with these reductions, the key interest rate could fall to 4.5% by the end of the year. The central bank, which had already begun cutting rates in August, held steady in September but now appears more likely to continue easing its restrictive policy.

The BOE’s decisions may also be influenced by a fall in wage growth reported earlier in the week by the ONS. Lower wage growth could further support the case for loosening monetary policy, as inflationary pressures linked to labor costs decline.

Market Reactions and Future Outlook

The release of the lower-than-expected inflation data caused a drop in the British pound, with sterling falling 0.6% against the U.S. dollar to $1.299, dipping below the $1.3 mark for the first time since September 11. The British currency also dropped 0.5% against the euro.

Additionally, yields on British government bonds, or gilts, fell across the board. The two-year gilt yield declined by 9 basis points, while the 10-year gilt yield dropped by 7 basis points.

Although inflation has eased from a peak of 11.1% in October 2022, some economists remain cautious about the longer-term outlook. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, noted that while the latest figures are reassuring, inflation could rebound in October due to an increase in the energy price cap. Thiru also emphasized that the BOE might wait for the UK Labour government’s budget at the end of October to assess any potential inflationary impacts before committing to further rate cuts.

Similarly, Paul Dales, Chief UK Economist at Capital Economics, warned that part of the weakness in core and services inflation was due to a significant drop in airfares. Dales predicted that the BOE may proceed with gradual 25-basis-point rate cuts at every other meeting but expects rates to eventually fall to 3.00%, below the 3.50-3.75% currently priced into markets.

Risk from the Upcoming Budget

The upcoming UK budget on October 30 presents another potential risk for the BOE’s decision-making. Sanjay Raja, Chief UK Economist at Deutsche Bank, suggested that while the inflation figures will be welcomed by the BOE, the government’s fiscal policies may still pose challenges. Raja expects the budget to be expansionary, which could add inflationary pressure despite ongoing fiscal consolidation.

As the BOE weighs its options, the central bank is expected to carefully monitor both the impact of the government’s policies and the global economic environment before determining the pace and scale of its rate-cutting cycle.

UK Inflation Holds Steady in August, Meeting Expectations

/in /tarafından

Inflation in the U.K. remained stable in August, according to data released by the Office for National Statistics (ONS) on Wednesday, aligning with predictions from analysts. The headline consumer price index (CPI) remained at 2.2%, the same as July’s figure and in line with forecasts from a Reuters poll. This steady reading follows 2% CPI rates in both May and June, matching the Bank of England’s (BoE) target.

Following the news, the British pound rose slightly by 0.18%, trading at $1.3183 early Wednesday morning.

Services Inflation Rises:
One area of particular interest to the BoE is services inflation, which increased from 5.2% in July to 5.6% in August. The rise in this category is closely watched as it reflects domestic price pressures. Core inflation, which excludes volatile items like energy, food, alcohol, and tobacco, also rose, hitting 3.6%, up from 3.3% in July.

According to the ONS, the largest upward pressure on prices came from higher airfares, which increased significantly compared to last year. However, motor fuel prices, along with hotel and restaurant costs, saw notable declines.

Monetary Policy Outlook:
The BoE is scheduled to meet on Thursday for its next monetary policy decision. While there were earlier bets of a second consecutive 25 basis point rate cut, these predictions have since been revised downward, with traders now placing the probability at 28%.

Richard Carter, head of fixed interest research at Quilter Cheviot, noted that while recent economic data pointed to stagnation in the U.K.’s output and a slowdown in wage growth, the stickiness of core inflation complicates the BoE’s decision-making process. Carter suggested that the BoE might adopt a more cautious approach compared to the U.S. Federal Reserve, which has maintained a more aggressive stance.

Ruth Gregory, deputy chief U.K. economist at Capital Economics, shared similar concerns about the rise in services inflation, predicting that upward pressure on prices could persist, especially with potential increases in utility costs on the horizon. Gregory expects the BoE to hold off on further rate cuts until November, with additional cuts likely to be spaced out until mid-2025.

Economic Planning and Inflation Management:
Ahead of the U.K.’s Autumn Statement, set for October 30, the new Labour government will present its budget plans. Chief Secretary to the Treasury, Darren Jones, acknowledged that while inflation is becoming more manageable, substantial efforts are still needed to address deeper economic challenges.