But April’s figures could still contain signs that inflation may start to plateau. Prices rose 8.5% in March compared to a year ago. Analysts expect the April figures to be high by historical standards, but could fall a bit, to around 8.1%. For example, the hot real estate market may begin to ease in some regions as mortgage rates reach their highest levels in more than a decade.
Fed hikes rates half a percentage point to fight inflation
But no matter the inflation figure, economic officials agree that it will take months of data to gauge which direction prices move towards. High inflation has plagued a recovery that has been strong for many other measures, hurting President Biden’s approval ratings and increasing pressure on the Federal Reserve. It also tested Americans’ ability to absorb more expensive rent, groceries or gasoline, not knowing when the pressure will wear off.
Rachel Reynolds, director of marketing at Atlanta Mission, a homeless shelter, said rising prices are consistently cited as one of the top reasons people seek help. The shelter serves about 800 men, women and children every day, and its food costs are expected to double this year. To save on the cost of staff and space, the organization has consolidated its operations and now prepares meals in one kitchen.
“A lot of the patterns I’ve seen, regarding the pandemic, is that it caused financial stress,” Reynolds said. “We have people who weren’t able to pay rent, pay for childcare or the cost of living. The clients we see have fixed incomes. Many say they can’t pay their bills.
How policymakers react will have direct implications for families and businesses nationwide. The government’s main tool for fighting inflation relies on the Fed, which can raise interest rates to make a range of loans more expensive. Higher borrowing costs tend to chill the economy by weighing on business and consumer spending, and ultimately drive down prices overall.
Mortgage rates rise, but hot housing market slow to cool
The Fed launched an ambitious plan to reduce inflation with seven interest rate hikes this year. The Fed gave the go-ahead to the second of those hikes last week, opting for a more aggressive, half-percentage-point hike, the biggest hike since 2000. Fed Chairman Jerome H. Powell , said similar increases would occur in the coming months.
But even if Fed policymakers race for control inflation and cooling the economy, the way is dangerously cunning. Rising interest rates too much and too fast could force the economy to contract completely, sending the country into recession and prompting companies to be laid off.
“I expect it to be very difficult. It won’t be easy,” Powell said at a press conference last week. “And that may well depend, of course, on events that are not not…under our control. But our job is to use our tools to try to achieve that result. And that’s what we’re going to do.”
Gas prices have driven high inflation, especially since the Russian invasion of disrupted Ukraine global energy supplies. The nationwide average price of a gallon of gasoline hit $4.37 on Tuesday, the highest price AAA has recorded since it began tracking in 2000.
The Biden administration has taken several steps to lower gas prices, including increasing supply, tapping into the strategic petroleum reserve. But these measures brought little relief. On Tuesday, Biden said tackling inflation was his “top national priority” and blamed “Mr. Putin’s war on Ukraine” as the main reason for today’s high prices.
Gas prices hit record highs as Biden swears inflation is top priority
“I know families all over America are hurting because of inflation,” Biden said Tuesday in a White House speech. “I want every American to know that I take inflation very seriously.”
The Biden administration often cites the strength of the recovery, especially given the devastation of the coronavirus recession when it pulled 20 million jobs from the economy. The labor market has created more than 6.5 million jobs over the past year and is on track to return to pre-pandemic levels this summer. Wages are rising and consumer spending remains high.
But that message has found less and less success as inflation becomes the dominant economic problem of the coronavirus era. Although average incomes have increased by 5.5% over the past year, these gains have been wiped out by inflation. Gas prices, rents and grocery bills are among the most tangible ways people feel about the economy, and for many Americans this is the first time they’ve experienced inflation in their daily life.
“It’s our job to make sure inflation of this nasty high nature doesn’t take root in the economy,” Powell said last week. “Now the process of getting there involves higher rates, so higher mortgage rates, higher borrowing rates, and things like that. So it’s not going to be pleasant either. But in the end, everyone is better off.
Rate hikes are a blunt tool and cannot target specific problems in the economy. But policymakers are particularly focused on how the housing market reacts to Fed policies. Housing represents about one-third of the basket of goods and services used to measure the consumer price index. If housing prices do not slow soon, it will be more difficult for headline inflation to simmer to more normal levels.
The Fed’s plans to raise rates and shrink its large balance sheet have already pushed the 30-year fixed-rate mortgage up average above 5%, well above the 2.98% of a year ago. Housing experts, buyers and real estate agents across the country have recently pointed to lower mortgage applications, lower selling prices and lower sales of existing homes.
David Dworkin, president and CEO of the National Housing Conference, estimates that the cost of the monthly mortgage payment for a typical single-family home increases by about $200 per month for every point increase in mortgage rates.
But Fed rate hikes can’t build houses, and Dworkin doesn’t expect house prices to fall significantly. The country is 3-5 million homes short, and builders will find it harder to keep up if borrowing costs and construction costs also rise.
“It may slow the rise in inflation, but since it also increases the cost of producing badly needed housing, it may not reduce inflation,” Dworkin said. “So you could create a lot of economic problems and not get a result.”