Inflation rose stubbornly last month after more than a year of rising interest rates.
The Labor Department said Wednesday that consumer prices rose 4.9% in April from a year ago, a slightly smaller annual increase than the 5% rate in March.
It’s a challenging crossroads for policymakers, caught between persistently high prices and the growing risk of recession.
Inflation remains above the Federal Reserve’s target rate of 2%, although it has slowed significantly from a four-decade high last June.
Prices for housing, gasoline and used cars rose 0.4% in April from March.
Home inflation is expected to ease at some point, but not as quickly as some had expected, after a sharp drop in March.
„My sense is that there is a gradual slowdown here, but March seemed too good to be true,” said Omair Sharif, president of forecasting firm Inflation Insights.
Prices for used cars and trucks rose 4.4% from March, after falling last year. Dealers were forced to pay premium prices at auctions to keep the cars this winter.
„Demand picked up unexpectedly at the start of the year and distributors were stuck short,” Sharif said.
Air fares have dropped in the last month
Outside of housing and transportation, the cost of services hasn’t risen as quickly, which would be reassuring to inflation watchers at the Federal Reserve.
„Once you see some of these details, you should feel really good about where things are going in terms of inflation over the next three to six months,” Sharif said.
Airfare fell 2.6% in April after rising 4% in March.
„Airports are full, so people don’t travel much,” Sharif said. „But the pressure on airfares from jet fuel costs has eased.”
He also thinks air travelers are approaching the limit of what they are willing to pay.
„Only people can afford what it costs to fly from New York to LA or Chicago to Miami,” Sharif said.
The central bank faces a difficult task
The Federal Reserve has raised interest rates 10 times in the past 14 months to curb demand and rein in prices.
After the most recent rate hike a week ago, Fed policymakers hinted that further increases may be unnecessary. But given inflation and an uncertain economic outlook, the central bank has made no promises about its future course of action.
„It’s not business-as-usual macroeconomics right now,” New York Federal Reserve Bank President John Williams said on Tuesday. „There’s a lot of confusion in supply and demand, if you will.”
Williams told the Economic Club of New York that he expects inflation to drop to around 3.5% by the end of the year. He thinks the U.S. can avoid falling into recession, but acknowledges that recent turmoil in the banking system has added more economic risk.
The failures of Silicon Valley Bank and Signature Bank in March and First Republic Bank last week are making other lenders more cautious about extending credit, which could be a drag on economic growth.
„In February, I had this positive vision [that] The economy is going to grow very strongly,” Williams said. „It’s offset by the view that we’re going to see some slowdown in lending now,” as other banks are more cautious about lending.
A mixed blessing of a strong job market
Despite the crisis in the economy, the job market remains unusually strong. The unemployment rate is just 3.4%, a 54-year low. Employers added 253,000 jobs last month.
But the strength of the job market is a mixed blessing, as rising wages may also contribute to higher prices. Average hourly wage growth increased to 4.4% in April.
Federal Reserve Chairman Jerome Powell said last week that while wages and prices go hand in hand, he does not believe wages are the main driver of inflation.
Sharif agreed.
„You can argue that wages certainly drive up inflation and inflation drives up wages,” he said. „But many other elements play a big role.”
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