“No landing”: The Fed’s 2% target for inflation has not been reached after eight months of 3% growth in prices.

Inflation has been the main economic narrative of the post-pandemic era.

This story once consisted of two distinct sections. First, there was a sharp increase in price rises accompanied by employment losses and reopenings, with the 12-month inflation rate rising from less than 1% in June 2020 to over 9% in June 2022.

After then, it seemed as if the fever had broken, as price growth dropped over the next 12 months to only 3.1% in June 2023.

However, it is now evident that a stall—the third chapter—has arisen. The annual rate of inflation has been between 3% and 4% for the last eight months.

Even yet, in an attempt to nudge the rate of price rises back toward its stated 2% target, the Federal Reserve boosted interest rates to their highest point since the 1980s. Central bankers contend that low interest rates reduce price rises and, therefore, inflation by slowing the rate of borrowing and the demand for money.

The increased rates seemed to be effective. However, experts started cautioning last year that the marathon’s “last mile”—the one that gets you closer to the 2% target—would be the toughest. It seems those suspicions have come true.

“I believe that the market overestimated how quickly we would return to 2%,” said Michael Antonelli, a market analyst and managing director at Baird & Co.

Reducing what the Bureau of Labor Statistics calls “shelter costs” has proven to be the largest obstacle, he added. There are two primary types of expenses associated with homeownership: owner-equivalent rent and rent.

Forecasts of a significant slowing in price rises have now been defied by both categories for months, with price increases in January continuing over 6% on a 12-month basis.

“The components we thought would have been reduced, especially shelter, which comprises the bulk of CPI—it’s a gigantic weight in the composition of the index—we thought would have dropped further,” Antonelli said.

Redfin, a real estate company, said on Monday that rents increased 2.2% in February compared to the previous year to $1,981. The biggest increase since January 2023 is that amount. The month-over-month rise was 0.9%.

There is still disagreement in some of the statistics on the future strength of the economy. The employment data from last week revealed that while the economy was adding jobs at a strong pace, the unemployment rate was slightly rising.

There are also other elements at play. Higher commodity prices might be a reoccurring sign of supply-chain problems, especially given the unrest in the Red Sea, Citibank analysts warned investors in a report on Monday.

The Citi analysts said, “We do not expect inflation data over the coming months to be an overwhelming contrast to strong January data.”

According to Antonelli, the economy and the market are still doing so well that consumers are now facing a “no landing” scenario rather than the “soft landing” that the Fed had hoped for, in which inflation would continue to decline without a noticeable rise in unemployment.

That, in and of itself, is not a terrible thing. It simply indicates that inflation, which is higher than expected, is probably here to stay.

“A’soft landing’ implies we are near some kind of ground, but we’ve bounced into the ‘no landing’ category,” Antonelli said. “We’re in a situation where we have good demographics, a vibrant economy, a tailwind with [artificial intelligence], and the housing market is strong—all the things we see the economy now doing.”

However, as salaries have only just kept up with inflation, workers are barely making ends meet. Weekly wages adjusted for inflation now come to around $371, up from $367 in the months before the epidemic.

“It’s similar to having a bill accidentally fall out of your pocket,” said Mark Hamrick, the head of the Bankrate financial group’s Washington office and senior economic analyst. “You may replace it, but the harm to your buying power is not being repaired.”

Since the Fed has increased interest rates without causing a crisis in the labor market, it is more probable that these rates will stay high for some time to come since it believes that there is a bigger chance of prices rising again than there is of unemployment rates rising quickly.

Although traders are placing bets that June will see the first interest rate decrease of the post-pandemic era, a recent Reuters poll revealed that respondents now think there will be fewer rate cuts this year than anticipated.

Fed Chair Jerome Powell said in a recent statement to Congress that the first rate decrease of the post-pandemic era will probably occur this year, but he was unable to specify when due to the continuous pressures of inflation.

According to some economists, the state of the world economy might perpetuate the United States’ 3% inflation rate forever. Former Federal Reserve official David Andolfatto, who heads the economics department at the University of Miami business school, said that the rate of price increase would likely remain steady due to persistent geopolitical unrest and the need for military expenditure.

Nor are the ongoing federal budget deficits, a problem that neither political party has shown much interest in addressing.

Andolfatto observed, “These kinds of economies tend to run hot.” “I just see fiscal pressures from either side and getting inflation back down—compared with the previous decade, where we were undershooting—I just think that world is gone.”

Source: NBC NEWS