New peaks in US inflation reinforce fears of a recession in the country

The New York Times – As inflation begins to rise in 2021, price pressures are clearly linked to the pandemic: Disruptions to supply chains have left companies unable to produce cars, sofas and computer games fast enough to keep up with demand from homebound consumers. .

In this year, the War between Russia and Ukraine Fuel and food prices rose, intensifying price pressures.

But now, as these sources of inflation show the first signs of weakening, the question is how much overall inflation will slow. And the answer will be driven by what happens in one important area: the labor market.

employees Federal Reserve (Central Bank, U.S. Federal Reserve) They focus 100% on job and wage growth as they quickly raise interest rates to limit unwanted effects on the economy and slow rapid inflation. They strongly believe that the economy needs to slow down some of its momentum and bring it back to the 2% target to counter the worst inflation in four decades.

The way they intend to do this is by cutting costs, hiring and salaries – and to achieve that goal, they increase their borrowing costs. So far, a substantial slowdown is proving elusive, suggesting to economists and investors that the central bank needs to be more aggressive in its efforts to slow growth and lower inflation.

As this week’s data showed, prices continued to rise. Although the job market has warmed up a bit, employers are still hiring steadily and raising wages at their fastest pace in decades. This steady improvement appears to allow consumers to continue spending and to give employers the power and incentive to raise prices to cover rising labor costs.

According to economists, as inflationary forces remain constant, the risk that the Fed will over-regulate the economy increases and the US will enter a recession – which will lead to a slowdown in growth and an increase in unemployment.

“Inflation cannot be stopped in this economy without a recession and a high unemployment rate,” he said. Krishna Guha leads the central bank’s global policy and strategy team at Evercore ISI And he was predicting that he could control inflation without provoking an outright recession.

The challenge for the central bank is that, increasingly, inflation appears to be driven by persistent factors indirectly linked to the economy, and less by a factor caused by the pandemic or the war in Ukraine.

US consumer price index data for August, released on Tuesday, illustrates this point. Gasoline prices have fallen sharply in the past month, leading many economists to believe that this will reduce headline inflation. They also thought that recent developments in supply chains would reduce commodity price increases. Used car prices, which contributed significantly to last year’s inflation, are also coming down.

However, despite these positive developments, a rapid increase in spending on a wide range of products and services helped push up prices this month. Rent, furniture, restaurant meals and trips to the dentist are getting more expensive. The Inflation has increased by 8.3% annually and increased by 0.1% from the previous month.

“Inflation currently has a very large implicit component, based on a very modest labor market,” he said. Jason Furman is an economist at Harvard University. “Then, in any other month, inflation might be higher because of bad luck, like gasoline going up, or because of a stroke of luck, like gasoline going down.”

“The big question for the Fed is, ‘Has inflation peaked?’ But really, ‘Where will she take us?’ Aneta Markowska, chief economist at Jefferies. He estimates that it will be difficult to get inflation below 4%—twice the central bank’s 2% target—without a significant slowdown in the economy and job market.

“We still have the housing and job market, there’s still a lot of inflationary pressure from these two areas, and they’re very unbalanced,” Anetta said.

That’s why the central bank, which meets this week, is trying to bring supply and demand back into balance. l Translation by ROMINA CACIA