Inflation eases in US without rising unemployment for now
Federal Reserve (Fed) officials are in “uncharted waters” without clear historical data, because they set this policy under conditions of declining inflation but no rising unemployment rate. The relevant information refers to a survey by the staff of the Richmond Fed, where the current cycle of increasing borrowing costs is analyzed, which is unprecedented.
“The current cycle marks the first time in the entire postwar period that the Bank has made significant progress in reducing inflation without a corresponding increase in the unemployment rate, thereby placing us in uncharted waters,” Fed officials wrote Richmond, including senior advisor Pierre-Daniel Chart. That's because the Federal Reserve faces the widest gap ever between inflation and its target interest rate when officials begin tightening monetary policy in March 2022, with the unemployment rate holding steady and low today. despite the fastest rise in interest rates in at least 40 years, researchers said.
Whether, now, this kind of cost-free inflation reduction can continue is a matter that will be at the heart of the Fed's deliberations in the coming weeks as policymakers decide whether they have moved rates high enough or if they need to their further increase.
The latest economic data, however, supports the positive approach. The Consumer Price Index rose at an annual rate of 3.2% in July, up slightly from June's 3%. However, the underlying price trends showed a continued slowdown. Stripping out the volatile food and energy factor, core inflation eased in July to 4.7% from 4.8% in June, largely driven by housing costs, which Fed officials believe are set to moderate steady.
Prices on a wide range of goods and services, from air travel to medical care, fell last month compared to June. “Deflationary pressures are still escalating,” noted Paul Ashworth, chief economist at Capital Economics. In conclusion, by excluding house prices along with food and energy, which the Fed itself did to measure the extent of inflation in areas of the economy where it was concerned that inflation was becoming more entrenched, Paul Ashworth estimated that the Consumer Price Index actually fell month-on-month and year-on-year and rose just 2.5% in the end, close to the official target.