“It’s going to be a bumpy ride back down to 2 percent,” said Andrew Patterson, senior international economist at Vanguard. He pointed to used car prices, which could begin to heat up as prices rise on the wholesale market for used cars and for new cars, and added: “Nuance matters, so you really want to lift up the hood for any of these data releases.”
The Federal Reserve has been fighting to tame inflation for more than a year, aggressively hiking interest rates at the fastest pace in decades. The goal is to get borrowing costs high enough that consumers pull back on all kinds of spending and investment, shying away from higher mortgage rates and auto loans, or nixing plans to grow a business.
Last week, the Fed raised its benchmark interest rate for the 10th time in 14 months in what could be its final hike for now. Central bankers brought rates to a level between 5 and 5.25 percent, and they’ve already seen some progress on inflation as the housing market cools. Energy prices have also come down since Russia’s invasion of Ukraine last year triggered a surge in oil and gas costs.
Remarkably, the job market has stayed resilient through the Fed’s all-out effort to slow the economy. Employers created 253,000 jobs in April, and the unemployment rate dropped to 3.4 percent, matching a low unseen since May 1969.
But there is still a long way to go to stabilize the economy. In normal times, inflation rises by 2 percent every year (using the Fed’s preferred inflation indicator, which is not the one the BLS will report out on Wednesday), and the Fed has made clear it will not let up prematurely. But those plans have been complicated by stress in the banking sector, which has shot up as a concern for the stability of the entire financial system.
Since the failures of Silicon Valley Bank and Signature Bank in March, small businesses have felt banks pull back on lending, and stocks at a handful of regional banks are taking a beating. Fed officials expect the economy will slow as a result, but they don’t know how much. On Monday, a new Fed survey on bank lending practices also underscored that lenders expect to tighten loan standards even more in the near future, including for commercial real estate loans.
“We have a broad understanding of monetary policy. Credit tightening is a different thing,” Fed Chair Jerome H. Powell said in a news conference last week. “There’s a lot of literature on that. But translating it into rate hikes is uncertain. Let’s say it adds even further uncertainty.”
Further blurring the picture is the looming deadline over the debt limit.
In Cleveland, Dave Hunsinger’s business has been hit from every direction. Hanger costs for Granny Anne’s Dry Cleaning have tripled since the pandemic started. Plastic materials are going up, too. As customers grapple with rising prices of all kinds, Hunsinger sees them taking a look at their cleaning receipts and rolling their eyes as they’re headed out the doors.
He has tried to hold off on raising prices, but a recent trip out for fast food left him thinking differently. He was stunned to see his fried chicken lunch cost $16. Was it time to ask his customers for more?
“I’m going to look at my competitors,” Hunsinger said. “I’ll take a small bite. I’m not going to take it all. I look at my customers and what they’re willing to pay. I don’t know. It’s always a tough decision for me.”
