The U.S. economy is not imploding, despite the fact that it is decelerating. This is considered to be positive news in the realm of dismal science.
That is the message I derived from the most recent inflation data, which was published on May 15, 2024. The data indicated that U.S. consumer prices increased by 3.4% in the 12 months leading up to April 2024. This is a marginal decrease in comparison to the 3.5% increase that was observed in March 2024.
In other words, the rate of growth is not as substantial as it once was, despite the fact that prices are increasing. That is a positive development for consumers; the U.S. economy is significantly lower than the 9.1% annual inflation rate that was observed in June 2022.
Although energy and accommodation costs increased in April, the increases were relatively modest. The cost of food, in contrast, showed minimal variation in comparison to Additionally, when the prices of new and used vehicles decreased by 0.4% and 6.9%, respectively, in April, individuals who were interested in purchasing a vehicle were in favor.
The “core” consumer price index, which is frequently regarded as more accurate at forecasting future inflation than the “headline” CPI figures, is also slightly lower. This index excludes volatile food and energy prices. Despite increases of 3.9% in January, 3.8% in February, and 3.8% in March, the rate of growth declined to 3.6% in April.
Consequently, the report is generally optimistic: inflation rates were reported to be marginally below market expectations, which is in stark contrast to the apprehensions of many consumers.
I interpret this data report as additional evidence that economic growth is declining, albeit in a positive manner, as an economist. According to the most recent gross domestic product data from the Bureau of Economic Analysis, the economy expanded at a slower pace than anticipated in the first quarter of 2024, with a 1.6% growth rate. The most recent employment report also indicated a decrease in hiring, and the most recent data on job vacancies similarly indicated a cooling of the labor market.
Justification for the Federal Reserve’s strict monitoring
The primary objective of the Federal Reserve is to achieve equilibrium between two objectives: maintaining consistent employment and guaranteeing price stability. It accomplishes this by regulating and influencing interest rates.
A decrease in interest rates stimulates the economy, thereby fostering economic expansion and employment generation, but it can also contribute to inflation. A rate increase has the opposite effect: it impedes economic growth, which in turn reduces inflation but impedes employment.
Consequently, the Federal Reserve implemented a two-year campaign of rate rises in response to the significant increase in inflation that occurred following the COVID-19 pandemic. Presently, the rates are at their highest level in 23 years. As a result of the resultant rise in borrowing expenses, there is a significant interest among investors and potential purchasers for the Federal Reserve to lower interest rates.
I do not believe that the Federal Reserve will be in a hurry to lower interest rates from their current elevated level in response to May’s report. Although it is accurate that there is a deceleration, the rate of decline is remarkably consistent and does not result in a precipitous drop in prices.
There is no doubt that this is a source of frustration for both the Federal Reserve, which has a 2% inflation target, and potential homebuyers. Nevertheless, this suggests that the economy is currently stable. Inflation is not surging, and consumer expenditure is still increasing, according to the Bureau of Economic Analysis. In March, consumer expenditure increased by 5.8% year over year, which is an increase from the 4.9% rate reached in February.
The American consumer is the primary focus.
In the future, the anticipation of a “soft landing”—in which the Federal Reserve reduces inflation without inducing a recession—will be significantly influenced by the behavior of U.S. consumers. U.S. gross domestic product is approximately two-thirds comprised of consumer expenditure.
If American consumers abruptly cease spending, inflation will decelerate substantially, employment opportunities will disappear, and the gross domestic product may contract. Consequently, the Federal Reserve will shift its emphasis from inflation to economic stimulus, which will lead to a decrease in interest rates.
I mention this because the Federal Reserve Bank of St. Louis recently released a report that indicates a concerning increase in consumer credit card delinquency rates. The economic situation may be more precarious than it initially appears if the recent surge in consumer spending can be attributed, in part, to increased American credit card usage.
The positive news is that delinquency rates are still significantly lower than they were prior to the Great Recession, which occurred from December 2007 to June 2009. Consequently, there is no immediate cause for concern, despite the fact that this information is alarming.
In general, the economy appears to be sustaining stability, despite the fact that inflation rates continue to annoy the Federal Reserve.
