Catching a greased pig might not be a familiar tradition for everyone, but it perfectly captures the economic challenge the United States has been facing during the pandemic. Prices have been behaving like elusive pigs, seemingly slipping away despite assurances from policymakers and economists that inflation will soon be reined in to meet the Federal Reserve’s 2% target.
For a while, it appeared that the inflation “pig” had been cornered. The Consumer Price Index (CPI), a key indicator of inflation, was on a gradual descent, giving the impression that stability was returning to the economy. Concurrently, the labor market remained robust, the stock market was performing well until August, and consumer spending was buoyant.
However, much like the agility of a greased pig, inflation proved unpredictable. The August CPI data revealed a rise of 3.7% compared to the previous year, exceeding July’s 3.2% and surpassing analyst expectations of 3.6%. This surge was primarily driven by escalating energy prices, but even the core inflation, excluding volatile categories like energy and food, exhibited signs of resurgence. Core CPI registered a 4.3% year-over-year increase, with a 0.3% month-to-month uptick, exceeding Wall Street’s consensus.
In this economic “greased-pig” scenario, stability hinges on the confidence of investors and policymakers in their ability to tame inflation. Uncertainty raises questions about the future: What if the pig escapes our grasp? What will the economy look like if the chase continues? How disruptive will the pursuit become?
Losing control of inflation implies that interest rates will need to remain elevated for an extended period, tightening financial conditions for consumers, governments, and businesses. Eventually, consumer spending will decline, and reduced corporate profits will impact the stock market. The outcome could range from an economic slowdown to a recession, with central banks at risk of making errors in their attempts to manage the situation.
The intricate and unpredictable nature of the economy during the pandemic complicates the understanding of inflation’s persistence. The pandemic disrupted both supply and demand: supply chains were disrupted, factories closed, and businesses shut down, while stimulus checks and increased savings boosted demand. This imbalance caused prices to surge across various sectors.
The Federal Reserve’s efforts to rein in inflation have included multiple interest rate hikes. Still, the challenge now lies in curbing consumer spending, a trickier endeavor that could result in adverse consequences for the labor market.
If inflation regains momentum, the Fed will need to resume interest rate hikes. Prolonged high interest rates would continue to tighten financial conditions, burdening consumers and businesses. There is a risk that such a move could lead to a recession characterized by layoffs and stock market volatility.
While there is hope that the situation will resolve itself, the uncertainty persists. As Americans continue to spend vigorously, it becomes increasingly challenging to contain inflation. The longer the Federal Reserve’s rate hikes persist, the higher the likelihood of a hard landing for the economy.
Investor concerns are growing, and uncertainty prompts questions about the accuracy of the Fed’s economic models and the potential consequences of misreading economic dynamics. It’s evident that consumers are feeling the pinch of high inflation, with inflation-adjusted median household income declining.
In this pursuit of taming inflation, close is not enough, and the stakes are high. The United States cannot afford to let inflation run rampant, making it crucial to continue the challenging chase to rein in prices.
Linette Lopez is a senior correspondent at Insider.
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