The U.S. economy may be seeing inflation on the retreat, but economists are warning that the path to victory may be more difficult than anticipated. In an interview with CNBC, Mohamed El-Erian, who serves as the chief economic advisor at Allianz and president of Queens’ College at the University of Cambridge, expressed his concerns, stating, “The so-called last mile is going to get a lot trickier. We’re not going to have the tailwinds that we had, and we’re going to have some headwinds.”
Inflation measures the rate at which prices are increasing for goods and services, from everyday items like concert tickets and groceries to larger purchases such as furniture. Policy makers generally aim for a 2% annual inflation target.
The consumer price index, a key measure of inflation, has seen a gradual decline from a 9.1% peak in June 2022 to 3.4% in December 2023, bringing it close to the target rate. However, addressing the final hurdle of disinflation without affecting economic growth and risking a recession will be a daunting task, as noted by Gargi Chaudhuri, head of iShares investment strategy for the Americas at BlackRock, who stated, “The transition from 8-4% inflation is easier than the transition from 4-2% inflation.”
The challenge of reducing inflation is primarily centered on the “services” side of the economy. Services include experiences such as rent, auto repairs, haircuts, and medical care, and make up the majority of consumer spending. Meanwhile, the inflation rate for tangible goods like cars and clothes has already dropped significantly. Despite this, the persistence of inflation among services, particularly housing costs, continues to make the disinflation process more challenging.
While economists anticipate that inflation in the housing market will eventually moderate, other factors such as wage growth, labor market dynamics, and consumer spending patterns continually influence the inflation trajectory. The sustained strong wage growth, combined with businesses being able to raise prices without affecting consumer spending, could prolong the disinflation process.
However, not all economists believe that the last mile of disinflation will be as challenging. Some argue that the inflation battle is nearly won, pointing to the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures price index, which was already running below the target rate. Ultimately, the journey towards defeating inflation remains a complex and dynamic process.
As we navigate the road ahead, we will continue to monitor the economic landscape and gain insights from leading economists to understand the implications for businesses and consumers alike.
Source link
