Here’s why inflation isn’t slowing down

Inflation accelerated again in September, defying economists’ expectations and lingering at its highest level in decades.

Despite rapid rate hikes by the Federal Reserve, a collapsing global economy and slowing US growth, prices have continued to rise at a rapid pace.

Prices rose 0.4% in September, according to consumer price index (CPI) data released on Thursday, marking the second consecutive month of accelerating inflation. The annual inflation rate fell slightly to 8.2%, but remained close to levels not seen since the 1980s.

Here are five reasons why inflation continues to rise even as the economy slows.

A solid labor market

The United States added jobs at a rapid pace throughout 2022 as businesses struggled to fill a record number of vacancies. The combination of historically strong job creations, stable consumer spending and federal stimulus has given workers leverage in the job market.

As a result, millions of Americans have been able to find better work for higher pay two years into the COVID-19 pandemic that claimed 21 million jobs. But the shortage of job seekers has forced companies to raise wages – and in some cases, prices.

As the Fed raises interest rates, economists expect the labor market to weaken and possibly lower inflation as fewer households can afford to maintain spending.

“The labor market is holding up for now, but high inflation and rising interest rates are influencing both business and worker behavior,” Sinem Buber, ZipRecruiter’s chief economist, wrote in an article. analysis Thursday.

“As the costs of necessities rise, consumers may have less discretionary income to spend on big-ticket items and luxuries.”

Shortage of housing drives up prices

A nationwide shortage of affordable housing is putting pressure on US budgets and weighing heavily on inflation numbers. The recovery from the COVID-19 recession has only made matters worse.

Housing costs rose 0.7% in September alone and 8% over the past year as rents rise in the United States and Fed rate hikes push more Americans out of the housing market .

While the Fed intends to slow activity in the housing sector by raising mortgage rates, the resulting slowdown in home sales has forced potential buyers into a congested rental market, where the number of affordable rental apartments and houses has long fallen short of demand. .

“The key swing story is going to be housing…given that it’s the biggest component of inflation,” explained James Knightley, chief US economist at ING.

The Slow Healing of Supply Chains

Supply chains are far less stressed now than they were in 2021, when successive waves of COVID-19 variants, lockdowns in China, shipping backlogs, material shortages and a glut of new spending fueled inflation.

Inventories are increasing, delivery times are faster, and consumers are shifting their spending away from scarce goods.

But experts say manufacturers, suppliers and transporters are still working through the scars of years of worsening supply strain and keeping prices higher because of it.

“Some commentators have argued that supply chain inflationary dynamics have already eased, but that characterization still seems premature,” wrote Skanda Amarnath and Alex Williams of Employment America, a nonprofit research organization.

“Delivery times may no longer be increasing at an historic rate, but they still remain at historically high levels. We have yet to see sustained compression in delivery times that would indicate a healing supply chain “, they continued.

The war-driven spike in gasoline and energy prices in Ukraine has also put pressure on suppliers and added uncertainty to their outlook, especially as the world braces for a rebound in prices during the winter.

Stubborn profit margins

Businesses are facing higher costs for supplies and labor due to a combination of shortages and increased consumer demand.

However, the rise in the prices of certain goods and services seems to be far greater than the growth in the wages of the workers concerned and in the price of raw materials, according to some economists and policymakers.

Fed Vice Chair Lael Brainard said in a speech Tuesday that selling margins in the auto and retail goods sectors were much higher than they should be, given the costs at which suppliers and producers are confronted.

In other words, she argued, companies are charging more than they theoretically should be for certain products.

“The return of retail margins to more normal levels could contribute significantly to reducing inflationary pressures on some consumer goods, given that gross retail margins represent approximately 30% of total dollar sales,” said Brainard.

“There is ample room for margin recompression to help reduce commodity inflation as demand cools, supply constraints ease and inventories rise.”

Lagging impact of rate hikes

Although the economy has slowed since the Fed started raising interest rates, most economists think we haven’t even seen the beginning of the impact that rising borrowing costs will have on the economy, not to mention the inflation figures.

“It normally takes between 12 and 18 months for changes in monetary policy to begin to have a pronounced impact on inflation and the economy. The Fed has been raising interest rates for less than nine months, and aggressively for less than six months, so the delayed impact on prices is not unexpected,” wrote Cailin Birch, global economist at the Economist Intelligence Unit, in a Thursday analysis.

Some experts fear that the Fed’s insistence on raising rates further at upcoming meetings in November and December could be a devastating mistake, especially as some supply-side sources of inflation continue to wane.

It can often take several months for price cuts in the real economy to show up in CPI data, which means the Fed can overshoot inflation without realizing it at the time.

“The greatest danger now is that policymakers ignore the clear evidence that inflationary pressure is waning and instead wait for lagging indicators – the inflation data itself – to give the green light,” wrote Ian Shepherdson. , chief economist at Pantheon Macroeconomics, in an analysis Thursday.

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