Are we winning the inflation fight or what?
We've been fighting inflation for a year. Are we winning or what?
It’s May 3, 2023. Today, I’ll broadly discuss where we’re at in terms of inflation and the Fed and recessions and all that. Knowledge is power, right?
Checking in on the inflation fight
The Fed’s been fighting inflation for a year. How’s it going?
After a couple of weeks away, I think it’s worth it to try and gauge where we’re at in terms of the overall economy — after all, if the wheels come off this thing, we’re all going to feel the effects.
With that, there are a few things to take stock of: The inflation fight, interest rate increases, employment numbers, and the possibility of a recession. Yes, it’s all boring nerd stuff, but again, it’s important, and we can all get burned.
But I think it’s important to realize that, all things considered, we’re doing….fairly well? We’re going through a crunch, of course, with many companies conducting layoffs and banks failing. However, as I’ve written about before, that’s largely (though not entirely) due to the ground shifting under an economy that was built up on zero-percent interest rates and capital-flush investors over the past decade-plus.
So, we’re now paying the piper, in a way. We’re course-correcting, and experiencing some collateral damage.
Let’s take a look.
Inflation and CPI
The big issue facing the economy over the past year or two has been rising prices. Inflation. There are a lot of things that caused it, but inflation is and has been the wild chimp in the room that’s tearing the drapes down and punching holes in the wall. Or something like that, I don’t know.
The good news is that inflation is on a downward trajectory, which is exactly what we want to see. We generally measure inflation using the CPI (which, yes, has its issues). The latest CPI report, for April, showed the CPI at 5%. That means that prices are up 5% compared to the same time last year. Not great, but far better than the 9.1% we saw last summer. You can see, in the chart below, how prices went up and up and up over the past two years, and have subsequently started to fall:
Ultimately, we’re seeing the trend we want to see. Note that inflation measures the rate of inflation, so prices are still up 5% over where they were a year ago, and a year ago, they were up 4.2% from the year before that. So — yeah, prices are still high and increasing. But it’s the rate of that increase that’s slowing down, and what you need to keep an eye on.
The Fed and interest rates
This is where the Fed comes into the picture. The Fed has made fighting inflation is primary goal. Yes, they should’ve acted sooner, and yes, they should’ve done a bunch of things over the past decade that could’ve helped us avoid this whole kerfuffle. But here we are.
To recap, the Fed has been raising interest rates at a fast and furious pace, all in an effort to bring down inflation. The main idea is that making it more expensive to borrow money will lead to fewer people/companies doing so, lowering demand, and lowering prices.
As such, the Fed has raised interest rates from near zero to now 5%-5.25%, starting last year:
Today, the Fed raised them again — another 25 basis points. Given that inflation is coming down, though, it may pause hikes for now. Depending on the state of the economy later this year, too, it may lower them. Nobody knows, though.
The Fed has a mandate: Inflation should be at or near 2%, all the time. Given that we’re still at 5%, it still has ground to make up, hence the rate hikes.
Employment numbers are yet another critical variable because they generally move with interest rates. That is, since the Fed is raising rates, it’s been expected that the unemployment rate would go up as the economy slows down. Again: People are spending less because borrowing costs are higher, so fewer people are buying houses, cars, yachts, whatever — and the people who build, sell, and ship those things may get laid off as a result.
But so far, even with the rate hikes, unemployment has remained low. That’s a great thing. The latest unemployment report (there’s a new one coming out on Friday) for April showed the unemployment rate (U3, the one typically cited) at 3.5%, and 236,000 jobs were created in March. Again, all good numbers, but worth noting that job creation has been slowing down in recent months.
This is particularly important because the Fed is keeping an eye on employment — what it’s trying to do is to raise rates without forcing millions of people out of work. So far, it’s done so — there have been more layoffs this year, of course, but again, we’re not seeing nearly as much collateral damage as originally feared. Yet.
Let’s hope it stays that way.
This is also one of the odd reasons that the stock market hasn’t reacted favorably to good jobs reports: It increases the odds that the Fed would increase interest rates again. But we’re reaching a point where inflation is coming down, unemployment is remaining steady, and, well, we’re seeing the results we want.
Where we’re at
As I said before, this is pretty good, all things considered. But we need to remember that many of the indicators we use to gauge the health of the economy can be lagging, meaning that we don’t actually know or get a useful measure of certain things for several months. As such, we’ll have to wait and see — as we’ve been doing for a year now.
A remaining question, however, is whether or if we’ll see prices revert to pre-inflationary levels. The answer is probably no, as the price hikes we’ve seen for many goods and services have been effectively baked in at this point. It’s becoming increasingly clear that many businesses are charting more just because they can do so without much backlash — inflation is giving them some cover, in a way. There’s not much anyone can do about that.
It’s vastly complicated. All of it.
But I think if you told me that we’d be looking at the outlined metrics in May 2023, given where we were last summer? It’s not bad. And remember, it’s good to have a rough idea of what’s going on. I’ve been blindsided by economic slides in the past, wondering what the hell was going on, and it wasn’t fun.
Knowledge is power, friends, and it can be helpful to have the lay of the land so you can plan your next moves — in your career, the market, whatever.
Numbers and links
2%: The portion of overall taxes used to fund the Federal Aviation Administration paid by private jet travelers, despite comprising 16% of all flights. (HEATED)
Hell comes to Hellertown?: A federal judge told a Pennsylvania school district that it had to allow the After School Satan Club to meet in school facilities after previously shutting it down because a lot of people are still evidently figuring out how America works. (ACLU)
No guarantees, no refunds: Inside a secretive life-extension clinic in Mexico. (WIRED)
Writers’ strike: Hollywood writers have gone on strike, and it may look a lot different than it did in 2007. (Fast Company)