Consumers struggling with skyrocketing prices for food, gas, autos,
and rent got a tantalizing hint of relief last month when prices
didn’t budge at all from June after 25 straight months of increases.
With gas prices continuing to fall, inflation is probably slowing
further this month.
So has the worst bout of inflation in four decades possibly peaked?
Economists say it’s too soon to know for sure. Even if inflation has
peaked, it will likely remain high well into next year.
Since inflation ignited early last year, it has temporarily slowed
before, only to re-accelerate in later months. When that happened last
fall, Federal Reserve Chair Jerome Powell was forced to jettison his
description of higher prices as being merely “transitory” and to
acknowledge that high inflation was proving to be chronic.
Even if some prices should keep declining, others — housing costs, for
example — are almost sure to remain painfully high. And that means
there’s likely still a long way to go before inflation will get
anywhere close to the 2% annual pace that the Fed has targeted and
that Americans were long accustomed to.
On Wednesday, the government reported that consumer inflation jumped
8.5% in July from 12 months earlier. That was an unexpectedly sharp
slowdown from the 9.1% year-over-year inflation rate in June, which
was the largest in four decades. But it was still quite high.
So-called core prices, which exclude the volatile food and energy
categories to produce a better picture of underlying inflation, also
rose more slowly: They increased 0.3% from June to July, less than the
0.7% rise from May to June. Over the past 12 months, core prices rose
5.9%, the same as in June.
Here are some questions and answers about inflation:
WHERE IS INFLATION HEADED?
That’s hard to say because there are multiple signs pointing in both directions.
In addition to the ongoing decline in gas prices, the cost of
groceries — a huge driver of inflation for the past year — could soon
rise much more slowly. Futures prices for dairy, chicken, and eggs
have been falling in recent weeks, according to Capital Economics, a
forecasting firm. And costs for such farm commodities as wheat, corn,
and soybeans are also well off their springtime peaks.
Many supply chain snarls are loosening, with fewer ships moored off
Southern California ports and shipping costs declining. That should
help reduce the cost of furniture, cars, and other goods. Prices for
appliances are already falling.
In addition, Americans’ expectations for future inflation fell last
month, according to a survey by the Federal Reserve Bank of New York,
likely reflecting the drop in gas prices that is highly visible to
Inflation expectations can be self-fulfilling: If people believe
inflation will stay high or worsen, they’re likely to take steps —
such as demanding higher pay — that can send prices higher in a
self-perpetuating cycle. But the New York Fed survey found that
Americans foresee lower inflation in future years than they did a
ARE THERE SIGNS INFLATION COULD STAY HIGH?
Plenty. Inflation is a byproduct of broad economic trends — too much
money chasing too few goods, in the classic economic view — not merely
whether individual industries are struck by supply shortages or other
One trend that may be keeping Fed officials up at night is that
companies are still hiring workers at a voracious pace — and are
willing to pay more to find the people they need. In the April-June
quarter, employees’ wages and salaries, excluding government workers,
jumped 1.6%, matching a two-decade high that was reached last fall.
Businesses typically pass on at least some of their higher labor costs
to their customers in the form of higher prices. But if workers become
more productive — if they use more technology, say, or a company
streamlines operations — a business can pay more and make up for the
higher costs through greater efficiency rather than through higher
prices for customers.
Unfortunately, for the first half of this year, the opposite has
happened: Productivity has tumbled and wages, adjusted for declining
efficiency, have been growing at double-digit levels. Economists say
that means further pay increases would have to be passed on to
consumers through higher prices. And those price increases would fuel
continued high inflation.
“This is way above anything we’ve seen since the high inflation of the
early 1980s,” said Peter Hooper, head of economic research at Deutsche
Bank Securities, referring to labor costs. “The danger here is that
you’re entering into a wage-price spiral, that increasing wage costs
are pushing up prices further and making it that much more difficult
to actually bring down inflation to a more desirable level.”
WHAT’S CAUSED THE SPIKE IN INFLATION?
Good news — mostly. When the pandemic paralyzed the economy in the
spring of 2020 and lockdowns kicked in, businesses closed or cut hours
and consumers stayed home as a health precaution, employers slashed a
breathtaking 22 million jobs.
Everyone braced for more misery. Companies cut investment and
postponed restocking. A severe recession ensued.
But instead of sinking into a prolonged downturn, the economy staged
an unexpectedly rousing recovery, fueled by vast infusions of
government aid and emergency intervention by the Fed, which slashed
short-term interest rates.
Suddenly, businesses had to scramble to meet demand. They couldn’t
hire fast enough to fill job openings or buy enough supplies to meet
customer orders. As business roared back, ports and freight yards
couldn’t handle the traffic. Global supply chains seized up.
With demand up and supplies down, costs jumped. And companies found
that they could pass along those higher costs in the form of higher
prices to consumers, many of whom had managed to pile up savings
during the pandemic.
Critics blamed, in part, President Joe Biden’s $1.9 trillion
coronavirus relief package, with its $1,400 checks to most households,
for overheating an economy that was already sizzling on its own. Many
others assigned greater blame to supply shortages. And some argued
that the Fed kept rates near zero for far too long, lending fuel to
runaway spending and inflated prices in stocks, homes, and other
HOW ARE HIGHER PRICES AFFECTING CONSUMERS?
It’s hitting most people pretty hard, even if they have received pay
raises. On average, weekly paychecks, adjusted for inflation, fell
3.6% in July compared with a year ago.
For lower-income families, economic research shows that the hit is
typically harder. Poorer Americans are more likely to spend a greater
proportion of their incomes on items that have increased the most in
price in the past 18 months: Food, gas, and rent.
There are also subtler differences that can make inflation harder for
those earning less. Many people can’t afford the kind of bulk
purchases of groceries that can help higher-income households
Paola Becerra, 40, who lives in Stamford, Connecticut, has started to
miss doctor’s appointments to use the money instead for groceries or
“My groceries for just one week are now never below $100,” she said.
“And I can’t buy in bulk because I don’t have a big fridge.”