Inflation is not as high as last year. The job market is not that hot. The economy is slowing down. But none of this is happening as quickly or smoothly as Federal Reserve officials would like.
The latest evidence came on Friday, when a series of government reports painted a picture of an economy generally moving in the direction policymakers want, but taking time.
“We knew inflation was going to be rocky and bumpy,” said Megan Greene, chief economist at the Kroll Institute. “We’ve found peak inflation, but it won’t be an easy way down.”
Consumer prices rose 4.2 percent in March from a year earlier, according to the Fed’s inflation measure, the Personal Consumption Expenditures Index, the U.S. Commerce Department said Friday. That was the lowest inflation rate in almost two years, after peaking at 7 percent last summer.
But after scrapping food and fuel prices, a closely watched “core” index held broadly stable last month. That measure increased by 4.6 percent over the year, compared to 4.7 percent in the previous reading – a figure that was revised slightly.
Wages, meanwhile, continue to rise rapidly – good news for workers trying to keep up with the rising cost of living, but likely a source of concern for the Fed.
Data from the Labor Department on Friday showed that wages and salaries for private sector workers rose 5.1 percent in March from a year earlier. That was the same growth rate as in December and defied forecasters’ expectations of a modest growth slowdown. A broader measure of compensation growth, which includes both benefits value and compensation, actually accelerated slightly in the first quarter.
The Fed has been raising interest rates for more than a year in an effort to cool the economy and bring inflation back to the central bank’s target of 2 percent a year. Friday’s data is likely to add to policymakers’ belief that their work isn’t done yet — officials are widely expected to raise rates by a quarter of a percentage point, to just over 5 percent, when they meet next week. That would be the central bank’s tenth consecutive rate hike.
Wage data is a particular focus for Fed officials, who believe the labor market, where there are far more jobs available than workers to fill them, is pushing wages up at an unsustainable rate, contributing to inflation. Other measures suggested a stronger slowdown in wage growth than showed in Friday’s data, which is less timely but generally considered more reliable
“If Fed officials hesitate at a rate hike in May,” Omair Sharif, founder of Inflation Insights, wrote in a note to clients on Friday, the wage data “is likely to prompt them to support at least one more hike.”
But a crucial question is what comes next. Central bankers predicted in March that they could stop raising interest rates after their next move. Fed Chairman Jerome H. Powell could explain whether that is still the case after the central bank’s interest rate announcement next week. The decision will depend on incoming economic and financial data.
Investors largely shrugged off the numbers Friday morning, focusing instead on a week of robust earnings reports that indicated that corporate America has not yet fully felt the impact of higher interest rates. The S&P 500 index rose 0.5 percent during afternoon trading. Government bond yields, which track the government’s cost of borrowing more money and are sensitive to changes in interest rate expectations, fell slightly.
The Fed faces a delicate task as it tries to raise borrowing costs just enough to discourage hiring and ease wage pressures, but not so much that companies start laying off workers en masse.
Higher interest rates have already taken their toll on housing, manufacturing and business investment. And data from the Commerce Department on Friday suggested that consumers — the engine of the economic recovery so far — are beginning to succumb. After a strong increase in January, consumer spending barely grew in February and remained flat in March. Americans saved their income in March at the highest rate since December 2021, a sign that consumers may be becoming more cautious.
“You can see some of that robustness starting the year really starting to reverse a little bit,” said Stephen Juneau, an economist at Bank of America.
Many forecasters believe that the recovery will continue to slow down in the coming months – or may have already done so. The March data does not capture the full impact of the Silicon Valley Bank collapse and the financial turmoil that followed.
“If you take a picture of the data as it was in the first quarter, you get the impression of still robust economic activity and inflation that is still too high and too persistent,” said Gregory Daco, chief economist at EY, the consulting firm. formerly known as Ernst & Young. If there were real-time data on spending, credit terms and business investment, he said, “it would paint a very different picture than the first-quarter data would indicate.”
The challenge for Fed officials is that they can’t wait for more complete data to make their decisions. Some indications point to a more substantial slowdown, but other signs suggest consumers continue to spend and companies continue to raise prices.
“If we see inflation that justifies us taking additional pricing, we’ll accept it,” Brian Niccol, CEO of the burrito chain Chipotle, said during an earnings call this week. “I think we’ve now demonstrated that we have pricing power.” The company increased menu prices in the first quarter by 10 percent compared to the same period last year.
Wage growth is a particularly thorny issue for the Fed. Faster wage increases have helped workers, particularly those at the bottom of the income ladder, keep up with rapidly rising prices. And most economists, both inside and outside the Fed, say wage increases have not been the main driver of the recent period of high inflation.
But Fed officials worry that if companies have to keep raising wages, they’ll have to keep raising prices. That could make it difficult to keep inflation in check, even as the pandemic-era disruptions that caused the initial rise in prices ease.
“As an employee, it always feels good to see more money in your paycheck,” says Cory Stahle, an economist for the job site Indeed. “But it also feels bad to walk into the store and pay $5 for a dozen eggs.”
Joe Rennison reporting contributed.
