The Federal Reserve may be nearing its inflation target, but the issue is far from resolved as high prices continue to affect individuals, businesses, and policymakers. While recent reports indicate that inflation is slowing down and could soon reach the Fed’s 2% goal, the cost of goods and services remains a significant burden.
Goldman Sachs recently predicted that upcoming data from the Bureau of Economic Analysis might show inflation close enough to be rounded down to 2%. However, inflation is complex and varies across different metrics, making it clear that the overall price burden remains substantial.
Inflation, often measured by indicators like the Consumer Price Index (CPI) and the personal consumption expenditures (PCE) index, has shown significant improvement. CPI inflation peaked at 9.1% in June 2022 and is now around 2.4%, while the PCE index, which the Fed favors, is also declining.
However, despite these improvements, many Americans and Fed officials are still uncomfortable with inflation levels. San Francisco Fed President Mary Daly, for example, emphasized that while inflation has eased, continued progress is not guaranteed, and the Fed must remain vigilant.
The challenge the Fed faces is balancing inflation control with interest rates, which remain high despite inflation falling. Daly’s remarks capture the dilemma of convincing the public that inflation is easing while interest rates stay elevated.
Fed Nears Inflation Target, But Persistent High Prices and Debt Keep Economic Concerns Alive for Consumers and Small Businesses
Furthermore, inflation’s long-term effects are still felt after a multi-year surge in prices. Although the annual inflation rate has improved, prices have increased significantly over the past three years, affecting essentials like food, housing, and gasoline.
While some inflation indicators, such as CPI and PCE, show signs of relief, others remain stubborn. For instance, the Atlanta Fed’s “sticky price” inflation, which measures items like rent and medical care, still runs at a 4% rate, indicating persistent high costs in less volatile areas.
In contrast, “flexible CPI,” covering fluctuating prices like gasoline, has seen deflation. This disparity highlights how inflation affects different parts of the economy unevenly, complicating the Fed’s task of addressing it.
Consumer spending has remained strong despite high inflation, driven partly by increased borrowing. In the second quarter of 2024, consumer spending reached nearly $20 trillion annually, although year-over-year spending growth was below the inflation rate.
Household debt has also surged, rising by $3.25 trillion since the inflation spike in early 2021. Although current delinquency rates remain manageable, rising debt levels and higher delinquency rates suggest that consumers may struggle if inflation remains elevated.
Small businesses are also feeling the effects of inflation and high borrowing costs. Credit card usage among small businesses has risen, with balances up 20% compared to pre-pandemic levels. Inflation remains a top concern for many small firms, with 23% of respondents in a recent National Federation of Independent Business survey identifying it as their primary issue.
Although some relief may come if the Fed lowers interest rates further, inflation’s persistence makes the future uncertain for both small businesses and consumers.
As the Fed approaches its November meeting, it faces critical decisions about interest rate policy. Despite the September rate cut, financial markets have responded by pricing in higher rates ahead.
This has led to higher mortgage rates and bond yields, with some analysts cautioning that further rate cuts could risk reigniting inflation. The Fed must navigate these complex dynamics carefully to avoid policy mistakes while ensuring that inflation remains under control and financial stability is maintained.
