Why It's Too Early to Celebrate Plummeting US Inflation Rate
© AFP 2023 / EVA HAMBACH
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US Federal Reserve Governor Christopher Waller made it clear on Friday that he wants to further tighten the screws on US monetary policy despite dipping inflation in the country.
The inflation rate is continuing to decline in the US in an apparent sign that the Federal Reserve's efforts to cool the national economy with higher interest rates are working. So what is the current level of US inflation? Sputnik explores.
US Inflation Rate in March
A recent US Labor Department report has revealed that the country’s inflation slowed more than expected in March, dipping to a 5% annual rate, the lowest pace of price rises since May 2021. Even so, the inflation remains well above the Federal Reserve's 2% target level.
The department’s report on the consumer price index (CPI) showed that March became the ninth straight month of declining annual inflation in the US, from June 2022's peak of 9.1%, which was a four-decade high.
The CPI, which indicates the monthly change in prices paid by US consumers, remains one of the most popular measures of inflation.
According to the Labor Department survey, food prices grew at a slower rate in March (8.5% against 9.5% in February) and energy cost fell (-6.4% vs +5.2%), including gasoline (-17.4%) and fuel oil (-14.2%).
Prices for used cars and trucks declined once again (-11.6% vs -13.6%), but on the other hand, inflation for shelter, which accounts for over 30% of the total CPI basket, continued to grow higher (8.2% vs 8.1%), the report has revealed. On a monthly basis, the all-items index rose 0.1% in March from February, less than the 0.2 percent increase economists had expected.
As for the so-called core inflation, it increased 0.4% in March from the prior month, and 5.6% from 12 months ago, up slightly from February's increase of 5.5%.
Core inflation, which indicates the change in the costs of goods and services, does not include those from the food and energy sectors. This measure of inflation excludes these items because their prices are much more volatile.
POTUS Praises 'Progress' in WH's Fight Against Inflation
US President Joe Biden was quick to tout the latest inflation data, saying in a statement that the Department of Labor report “shows continued progress in our fight against inflation.”
“While inflation is still too high, this progress means more breathing room for hard-working Americans – with wages now higher than they were 9 months ago, after accounting for inflation,” he added.
POTUS stressed that US inflation “has now fallen by 45% from its summer peak,” with gas prices down more than $1.40 from the summer, and grocery prices falling in March for the first time since September 2020.
“In recent months, we have also seen price declines for items like used cars, smart phones, and other electronics,” the 46th US president said, urging the government to “build on that progress” in stemming inflation.
GOP Member Downbeat Over Inflation Report
Biden's critics, however, remained pessimistic about the Labor Department’s survey, recalling that inflation is still too high and blaming the policies of the Democratic Party.
Republican National Committee Chairwoman Ronna McDaniel said in a statement that “Inflation is up, wages are down, and Americans are struggling to stay afloat in Biden's failed economy.”
“Democrats have neither answers nor solutions – their policies only worsen the economic burden on families, yet Biden wants taxpayers to foot the bill for his $6.9 trillion tax-and-spending spree that will send inflation soaring even higher," she added, referring to the proposed federal budget that the US president unveiled last month.
She was echoed by Dr. Paul Craig Roberts, a US economist and ex-assistant secretary of the Treasury in the Reagan administration, who told Sputnik that despite inflation in America plummeting to 5% in March, it's too early to pop open the champagne, as the country’s economy is tainted by a variety of maladies.
"The way they measure unemployment and inflation, for example, are designed to understate both. They don't count unemployment in a proper way, and they don't measure inflation in a proper way. There are historical reasons for this. They don't like to measure inflation properly, because they have to pay out more cost of living adjustments. For example, to Social Security. And a number like high unemployment numbers. So we don't really know what the numbers tell us. They're making their optimistic view on the basis of 156,000 new jobs in March, and they claim no further rise in inflation. So they're thinking in the old Phillips curve way that if you want to grow, you have to pay for it by having higher inflation. And they're saying, 'Oh, we're not having the higher inflation, but we still had 156,000 jobs.' Well, we don't know if we did or not,” Roberts argued.
The same tone was struck by John Leer, chief economist at decision intelligence company Morning Consult, who was cited by UK media as saying that even though “headline inflation [in the US] cooled” in March, “it's not time to celebrate just yet.”
“Topline inflation was driven lower primarily by falling energy prices, which tend to be volatile from month to month. Core inflation remains stickier and more persistent than the Fed would like, and combined with the strength of the March jobs report, there's a growing case for the Fed to raise rates yet again at its next meeting,” Leer claimed.
Federal Reserve Governor: Fight Against Inflation Not Over
Federal Reserve Governor Christopher Waller has, meanwhile, made it clear that he wants more monetary tightening in the US despite evidence that inflation is coming off four-decade highs.
"Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further," Waller pointed out.
The Federal Reserve governor ruled out any likelihood of the Fed taking its foot off the interest rate hike pedal.
"I would welcome signs of moderating demand, but until they appear and I see inflation moving meaningfully and persistently down toward our 2% target, I believe there is still work to do," he stressed.
Waller also said that unyielding labor market growth was an indication that "we [the US government] haven’t made much progress on our inflation goal, which leaves me at about the same place on the economic outlook."
The Fed has raised US interest rates by 475 basis points over the past 13 months to fight inflation, taking them to a peak of 5% from 0.25% after the COVID-19 outbreak in March 2020.
What is Inflation?
Inflation takes place when the prices of goods and services grow over a long period of time, causing a person’s purchasing power, or the amount of goods and services he or she can buy with a single unit of currency, to decrease.
13 April 2023, 18:35 GMT
In other words, inflation means that a person’s money is unable to buy as much today as it could in the past.
It's worth noting that inflation is not the same as a price increase for a single good or service, and that the inflationary process typically involves simultaneous and continued price rises of many of the things that people buy regularly. Governments and central banks seek to control inflation through monetary policy.
Causes of Inflation
As mentioned above, the root of inflation is a rise in a country’s money supply, which can be increased by the monetary authorities through:
Printing and giving away more money to citizens
Legally devaluing (reducing the value of) the legal tender currency, namely, any notes and coins that are officially authorized by a government
Loaning new money into existence as reserve account credits via the banking system by purchasing government bonds from banks on the secondary market , which is the most common method. In all of these cases, the money ends up losing its purchasing power.
Types of Inflation
The types of inflation are characterized by either a root cause or the rate of increase in prices:
Demand-pull inflation occurs when a rise in the supply of money and credit prods the overall demand for goods and services to soar more rapidly than the economy's production capacity. This increases demand and results in price rises.
Cost-push inflation takes place when production costs rise. These increased production costs are unrelated to consumer demand and may lead to a decrease in total supply and a subsequent increase in prices to compensate. This kind of inflation commonly takes place when the price of oil increases, making manufacturing operations more expensive.
Built-in inflation pertains to adaptive expectations or the idea that people expect current inflation rates to continue in the future. As the price of goods and services rises, people may expect a continuous rise in the future at a similar rate.
Stagflation is related to an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation, something that economic policymakers find particularly difficult to grapple with.
Deflation is the opposite of inflation, namely, a negative inflation rate or a drop in prices of goods and services.
