In the past few months, the war in Ukraine, along with coronavirus shutdowns in China, have roiled global energy markets and dealt the latest blow to supply chains, pushing prices even higher as families struggle to pay for the basics. But April figures may hold signs that such rapid price growth could be starting to plateau, even as inflation remains at 40-year highs and affect many of the parts of the economy people feel the most.
Fed hikes rates by half a percentage point in fight against inflation
The cost of shelter, food, airfare and new cars were the largest contributors to the April data. The food index increased 0.9 percent in April compared to March, notching its seventeenth consecutive monthly increase. The dairy index climbed 2.5 percent, its largest monthly increase since July 2007.
Russia’s war in Ukraine sent energy and gas costs soaring. But April data included an encouraging turnaround. The energy index dropped 2.7 percent in April, after jumping 11 percent in March. The gasoline index also fell 6.1 percent, after rising 18.3 percent in March. (Still, compared to last year, the energy index is up 30.3 percent and the gasoline index increased 43.6 percent.)
The index for used cars and trucks also fell 0.4 percent over the month, its third straight decline after a long series of increases.
No matter the exact figures, economic officials agree that it will take months of data to assess which way prices are heading. High inflation has been a scourge on a recovery that has been strong by many other measures, hurting President Biden’s approval ratings and intensifying pressure on the Federal Reserve. It has also tested Americans’ ability to absorb more expensive rent, groceries or gas, with little sense of when the strain will fade away.
Rachel Reynolds, director of marketing at Atlanta Mission, a homeless shelter, said rising prices are routinely cited as a top reason people seek help. The shelter serves around 800 men, women and children every day, and its food costs are projected to double this year. To save on the cost of staff and space, the organization consolidated operations and now cooks meals out of one kitchen.
“A lot of the patterns I’ve seen, regarding the pandemic, are that it has caused financial stress,” Reynolds said. “We have people who weren’t able to make rent, weren’t able to pay for child care or the cost of living. Clients we see are on fixed income. A lot are saying they can’t pay their bills.”
How policymakers respond will have direct implications for families and businesses nationwide. The government’s main tool to combat inflation rests with the Fed, which can raise interest rates to make an array of loans more expensive. Higher lending costs tend to cool the economy by weighing on business and consumer spending, and eventually lead to lower prices overall.
Mortgage rates are rising, but the hot housing market is slow to cool
The Fed has launched an ambitious plan to slash inflation with seven interest-rate increases this year. The Fed greenlit the second of those hikes last week, opting for a more aggressive increase, of half a percentage point, the sharpest hike since 2000. Fed Chair Jerome H. Powell said similar increases would be coming in the next few months.
But even as Fed policymakers race to control inflation and cool the economy, the path is dangerously tricky. Interest rates that rise too much and too fast could force the economy to contract altogether, sending the country into recession and prompting businesses to lay people off.
“I do expect that this will be very challenging. It’s not going to be easy,” Powell said in a news conference last week. “And it may well depend, of course, on events that are not … under our control. But our job is to use our tools to try to achieve that outcome. And that’s what we’re going to do.”
Gas prices have driven high inflation, especially since Russia’s invasion of Ukraine upset global energy supplies. The average price for a gallon of gas nationwide on Tuesday hit $4.37, the highest price AAA has recorded since it started keeping track in 2000.
The Biden administration has taken multiple steps to lower gas prices, including by boosting supply, by tapping the Strategic Petroleum Reserve. But those measures have provided little relief. On Tuesday, Biden said tackling inflation was his “top domestic priority” and blamed “Mr. Putin’s war in Ukraine” as the key reason for today’s high prices.
Gas prices reach record highs as Biden vows inflation top priority
“I know families all across America are hurting because of inflation,” Biden said Tuesday in a speech at the White House. “I want every American to know that I am taking inflation very seriously.”
The Biden administration often cites the strength of the recovery, especially considering how devastating the coronavirus recession was when it yanked 20 million jobs out of the economy. The labor market has added more than 6.5 million jobs in the past year and is on pace to return to pre-pandemic levels this summer. Wages are rising, and consumer spending remains high.
But that message has found less and less traction as inflation becomes the dominant economic issue of the coronavirus era. Although average earnings have risen 5.5 percent in the past year, those gains have been wiped out by inflation. Gas prices, rent costs and grocery bills are some of the most tangible ways people feel the economy, and for many Americans, it’s the first time they’re experiencing inflation in their daily lives.
“It’s our job to make sure that inflation of that unpleasant high nature doesn’t get entrenched in the economy,” Powell said last week. “Now, the process of getting there involves higher rates, so higher mortgage rates, higher borrowing rates, and things like that. So it’s not going to be pleasant either. But in the end, everyone is better off.”
Rate hikes are a blunt tool and can’t target specific issues in the economy. But policymakers are especially focused on how the housing market responds to Fed policies. Shelter accounts for roughly one-third of the basket of goods and services used to measure the consumer price index. If housing costs don’t slow down soon, it will be harder for overall inflation to simmer down to more normal levels.
The Fed’s plans to hike rates and draw down its vast balance sheet have already pushed the 30-year fixed-rate mortgage average above 5 percent, far above the 2.98 percent from a year ago. Housing experts, buyers and real estate agents nationwide recently have pointed to a drop-off in mortgage applications, drops in sale prices and a drop-off in sales of existing homes.
David Dworkin, president and chief executive of the National Housing Conference, estimates that the cost of the monthly mortgage payment on a typical single-family home goes up about $200 per month for every one-point rise in mortgage rates.
But Fed rate hikes can’t build houses, and Dworkin doesn’t expect home prices to meaningfully fall. The country is short some 3 million to 5 million homes, and builders are going to be hard-pressed to keep up if borrowing costs and construction costs inch up, too.
“It may slow the increase in inflation, but because it also increases the cost of badly needed housing production, it may not cut inflation,” Dworkin said. “So you could be creating a lot of economic pain and not getting the result.”