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Bringing inflation down is going to take time, patience — and pain

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A supermarket in Los Angeles is where products can be seen on May 27, 2022.

Lucy Nicholson | Reuters

It will be difficult and time-consuming to combat runaway inflation.

Slowing down the economy is necessary to end 40-years of price hikes. Producers’ ability to deliver their goods on the market will improve, and both demand and supply need to balance. These factors, most troublingly until the Ukraine conflict is settled, will not have an impact on the economic recovery.

A trend can be seen even in the most favorable of circumstances. gasoline reach nominal new highsThe price of daily foods, such as hamburger, cereal and eggs, has risen by nearly $5 per gallon over the last year. As housing costs continue to climb, so will the prices. Consumers will see little relief in the near future.

Sarah House, a senior economist at Wells Fargo described the probable downward trend in inflation as “slow descent”. When you look at inflation, most of it is driven by momentum. Slow moving prices are common. Prices are not just adjusted by companies on the whim.

In fact, Friday’s eagerly awaited inflation report will likely show little relief, if any.

According to Dow Jones estimates, inflation is likely to rise at 8.3% per year in the consumer price index. This measure measures the costs of large quantities of goods and services. The core CPI will show a slight decrease in growth from 6.2%, but it is still expected to rise by 5.9% if you exclude food and energy.

What’s more, the monthly gains are expected to accelerate — 0.7% for headline inflation versus a gain of just 0.3% in April. It is likely that Core would remain unchanged, with 0.5% increase, which would represent a one-tenth of a point decrease month-overmonth.

Looking through the numbers

However, economists will not only look at the headline numbers but also try to identify trends within the CPI components.

For example, energy and food make up 22% of the index. Any slowdown in these areas will be noted. Shelter costs make up 32%. This is an important component. CPI for services is 60%, while it’s 40% for goods. The main source of inflation is the good component.

Slowing down the economy will help. House stated that seeing weaker demand growth could help ease some of the stress. It’s more than a slowdown. It is crucial to consider the effects of compositions. Certain areas have greater importance than others. We could see spending falling in the area of goods inflation. This is where most of the pressure points lie.

Federal Reserve hopes to facilitate this process by increasing short-term interest rates. These were anchored at zero when the economy was recovering from pandemic-related restrictions.

Many markets expect that the Fed will continue to raise its benchmark interest rate by around 2.75% to 3%. This is a significant increase from the current range of 0.75 to 1%.

The Fed could have more to do.

An example from the 80s

National Bureau of Economic Research working paper released recentlyLarry Summers, former Treasury Secretary and Obama administration advisor, has suggested that the Fed might need to raise rates even more to keep inflation below 2%.

This paper compares the current inflation run to that of the 1980s when price rises were a concern. The Fed, led by Paul Volcker, raised the funds rate to 19% during that period, which eventually caused a severe recession and helped propel inflation down a spiral that would continue for almost 40 years until it reached the present downward spiral.

Many economists argue that this type of tightening will not be needed because inflation is at 14.8% today.

Summers’ paper stated that CPI was not calculated the same way in 1990, due to the fact it did not account for housing costs. The same method would result in core CPI being around 9.1% today.

According to the Summers team, “To bring back 2 percent core CPI inflation now will require approximately the same level of disinflation that was achieved under Chairman Volcker.”

Biden’s plans

Recently, President Joe Biden released his plan for lowering inflation.

A Wall Street Journal Op-Ed Biden said he would take measures to fix supply chain problems and bring down the budget deficit, which ran to nearly $2.8 trillion in fiscal 2021 but is on track to be a fraction of that this year — at just $360 billion through seven monthsThis is largely due to Congress’s inability to approve additional Covid-19 relief funds.

These measures will likely only nibble at inflation’s edges, as the President noted. The Fed does much of the heavy lifting.

Janet Yellen, former Fed Chair and Treasury Secretary, stated that they have “the primary role in bringing down inflation” at a hearing this week. They can do what they want.

Fed hikes take time, and it is important that economists look at all factors.

The latest announcements are from TargetAnd other retailers they will work to bring down excess inventoryAlso, it could lead to deflation. These moves, however, won’t have a significant effect on potentially frightening headline numbers because apparel is only 2.5% of the CPI.

Nicholas Colas, DataTrek Research founder and co-founder wrote that “if someone says recent news about some retailers discounting clothes will affect CPI in any meaningful way,” in his daily market report. Retailers could still give away clothes for free, and U.S. inflation wouldn’t be below 5 percent.

Inflation control will ultimately require the gradual release of forces responsible for the current condition. It will take a mixture of reduced growth and lower labor force, along with a host of other factors to achieve measurable relief.

House, the Wells Fargo economist said that “it’s going to not be easy.” If you can maintain a decent level of consumer and business spending, it will help to reduce inflation.

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