A shopper holds a shopping basket with groceries inside a grocery store in San Francisco, Calif., on Monday, May 2, 2022. (David Paul Morris/Bloomberg)
Inflation has eased to the lowest level in two years, but prices are still higher than normal — underscoring how difficult slowing the economy down has become.
Prices rose 4.9 percent in April compared with the year before, the Bureau of Labor Statistics reported Wednesday morning, and 0.4 percent compared with March. There's been significant progress on inflation from last summer, when the consumer price index hit 9.1 percent on a year-over-year basis. But even as inflation has eased for 10 straight months, policymakers are still fearful that inflation could become a permanent threat to workers and families who are also facing tighter credit conditions, rising loan payments and uncertainty about a recession.
Getting prices to settle down more won't be easy. Some problems have abated, like last year's surge in energy prices after Russia's invasion of Ukraine. Others are bubbling up, as a recent rise in wholesale used car prices starts showing up in consumer costs. And others aren't showing signs of letting up, as rising rent is still weighing heavily on household budgets nationwide.
"It's going to be a bumpy ride back down to 2 percent," said Andrew Patterson, senior international economist at Vanguard. He pointed to used car prices, which could begin to heat up as prices rise on the wholesale market for used cars and for new cars, and added: "Nuance matters, so you really want to lift up the hood for any of these data releases."
The major stock indexes rose slightly on the inflation report. By midmorning, the Dow Jones industrial average was up 69 points, or 0.21 percent. The S&P 500 was up 0.64 percent, and the Nasdaq 1.18 percent.
Housing costs continue to be the latest driver month to month. Rent was up 0.6 percent in April compared with March and is not expected to cool off until the number of homes available significantly increases or until cooling in the rest of the housing market finally trickles down to leases. Economists are not expecting that to happen in the near term.
Prices for used cars and trucks rose 4.4 percent in April, after falling 0.9 percent in March. Used cars had been a big driver of inflation earlier during the pandemic but had later eased. More recently, wholesale costs for used cars have been back on the upswing, and analysts and policymakers have been waiting for those rising costs to show up in consumer prices. Now they're starting to see it.
"That's just something we know is in the pipeline," said Diane Swonk, chief economist at KPMG. "This is what a bumpy path is."
There were some encouraging spots: Costs for airfares dropped 2.6 percent in April after rising in February and March. The index for new vehicles also fell slightly. Costs for major grocery staples — including produce, proteins, dairy and eggs — also cooled.
The Federal Reserve has been fighting to tame inflation for more than a year, aggressively hiking interest rates at the fastest pace in decades. The goal is to get borrowing costs high enough that consumers pull back on all kinds of spending and investment, shying away from higher mortgage rates and auto loans or nixing plans to grow a business.
Last week, the Fed raised its benchmark interest rate for the 10th time in 14 months in what could be its final hike for now. Central bankers brought rates to a level between 5 and 5.25 percent, and they've already seen some progress on inflation as the housing market cools. Energy prices have also come down since Russia's invasion of Ukraine last year triggered a surge in oil and gas costs.
The Fed will convene again in mid-June, and incoming data will determine whether policymakers decide to pause, or hike again. The next inflation report comes out at the start of the Fed's two-day meeting, and officials will have gotten the May jobs report a few weeks before.
Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, said he favors a June hike as of now, because there hasn't been convincing progress on a narrower measure of inflation. "Core" prices, which strip out more volatile categories like food and energy, were up 0.4 percent in April, as they were in March, and 5.5 percent compared to last year.
"Data between now and then could change my mind, but I think we still have a situation where underlying inflation is not meaningfully decelerating, and the Fed has been hiking rates for well over a year," Strain said.
Remarkably, the job market has stayed resilient through the Fed's all-out effort to slow the economy. Employers created 253,000 jobs in April, and the unemployment rate dropped to 3.4 percent, matching a low unseen since May 1969.
But there is still a long way to go to stabilize the economy. In normal times, inflation rises by 2 percent every year (using the Fed's preferred inflation indicator, which is not the one the BLS reported out on Wednesday), and the Fed has made clear it will not let up prematurely. But those plans have been complicated by stress in the banking sector, which has shot up as a concern for the stability of the entire financial system.
Since the failures of Silicon Valley Bank and Signature Bank in March, small businesses have felt banks pull back on lending, and stocks at a handful of regional banks are taking a beating. Fed officials expect the economy will slow as a result, but they don't know how much. On Monday, a new Fed survey on bank lending practices also underscored that lenders expect to tighten loan standards even more in the near future, including for commercial real estate loans.
"We have a broad understanding of monetary policy. Credit tightening is a different thing," Fed Chair Jerome H. Powell said in a news conference last week. "There's a lot of literature on that. But translating it into rate hikes is uncertain. Let's say it adds even further uncertainty."
Further blurring the picture is the looming deadline over the debt limit, which could fall just before — or even during — the Fed's next meeting. President Biden on Tuesday met with congressional leaders to discuss the debt ceiling and agreed to start work this week on the federal budget. But Republicans said they don't see "any new movement" toward a resolution.
In Cleveland, Dave Hunsinger's business has been hit from every direction. Hanger costs for Granny Anne's Dry Cleaning have tripled since the pandemic started. Plastic materials are going up, too. As customers grapple with rising prices of all kinds, Hunsinger sees them taking a look at their cleaning receipts and rolling their eyes as they're headed out the doors.
He has tried to hold off on raising prices, but a recent trip out for fast food left him thinking differently. He was stunned to see his fried chicken lunch cost $16. Was it time to ask his customers for more?
"I'm going to look at my competitors," Hunsinger said. "I'll take a small bite. I'm not going to take it all. I look at my customers and what they're willing to pay. I don't know. It's always a tough decision for me."
