Inflation: The latest outlook on rising consumer prices
Inflation is the annualized increase in prices for goods and services. And for the past few months, inflation has been rising. In January, the rate of inflation was just 1.5 percent. Two months later, it surged to 1.9 percent, where it currently stands.
Obviously, this spike triggered intense discussion on both Main Street and Wall Street. Would this surge in prices continue, and for how long? How fast would prices continue to rise? Would the Federal Reserve become more aggressive in raising interest rates? The questions and uncertainties seemed endless.
But on Wednesday, commentary released from the Fed’s May meeting indicated that inflation may be stabilizing. The Fed’s agenda calls for three interest rate hikes this year - the first was in March. These hikes, in effect, gently tap the breaks on economic growth by increasing the cost of borrowing. This acts as a constriction on consumer/business spending and thus helps keep rising inflation in check.
Until Wednesday, rising inflation, driven by a growing economy and strengthening labor market, had raised concerns of a fourth rate hike this year. The Fed’s latest commentary, however, seems to have alleviated some of that concern.
Inflation has been moving closer to the Fed’s target rate of 2 percent. The Fed judges that a 2 percent inflation rate, over the long-term, is the ideal healthy balance between price stability and economic growth. According to the Fed, inflation should stabilize around this target rate over the next several years.
The Fed’s agenda for gradual rate hikes and keeping inflation near its 2 percent target will be dependent on future economic data. The Fed predicts a strong U.S. economy, continued strength in the labor market, high consumer confidence and overall strength in the global economy. But things can quickly change.
In fact, some Fed officials noted concerns that may cause inflation to recede - most notably, uncertainty over tariffs and the U.S./China trade dispute. The current back-and-forth threats of additional tariffs between the U.S. and China could lower confidence in American businesses, ultimately reducing their capital spending. Also, recent data suggests some moderation in global economic growth, in particular, the United Kingdom.
Other Fed officials noted risks that inflation may accelerate above its 2 percent target. After a temporary pullback in economic growth in the first quarter, the Fed expects the economy to regain strength the rest of the year, fueled by President Trump’s corporate and personal tax cuts. Wage growth still remains modest, but further strength in the labor market could push employee wages even higher. For some Fed officials, high consumer and business confidence, a strengthening economy and higher income is a potent mixture that could send inflation surging higher.
The Fed is certainly in an unenviable position – predicting the exact course of inflation to properly administer its interest rate hikes. The next rate hike should be in June, leaving the Fed’s third and final projected hike in either September or December. As noted above, there is intense debate among Fed officials on how current economic and geopolitical forces may alter this course – sending inflation either receding below or surging above its 2 percent target rate. But for now, the Fed’s implication that inflation will stabilize is as close to a “win” as possible in helping to reduce the ongoing volatility in the stock market.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
