Don’t expect prices to go down soon: It will take a while to ‘wring extra inflation out of the economy,’ says economist

Inflation isn’t getting worse — but it’s still too high.

That’s the takeaway from the latest consumer price index report released Thursday, which reveals that the cost of U.S. goods and services stayed flat in September with a year-over-year rate of 3.7%, the same as August.

However, that’s still well above the Federal Reserve’s target of 2%. Despite inflation dropping from a June 2022 peak of 9.1%, the central bank doesn’t expect inflation to reach its target until at least 2026.

Month over month, overall inflation increased 0.4% in September. In August, the month-over-month rate was 0.6%.

Core inflation — the measure of prices excluding volatile food and gas prices — is considered by the Fed to be the best measure of where inflation is headed.

In September, core inflation posted a second consecutive monthly gain of 0.3%, which is roughly half the rate of inflation during summer 2022. That’s still a bit too high, based on the Fed’s target.

“It’s a temporary setback,” says Gus Faucher, chief economist at PNC Financial Services, noting that core inflation has slowed “substantially” in the past few months.

At the same time, “it is going to be more difficult for the Fed to wring extra inflation out of the economy,” he says.

What this means for your wallet

Aside from higher prices on everything you buy, persistently high inflation means that interest rates on credit cards, loans and auto financing will also remain elevated.

That’s because the Fed has been trying to slow inflation through a series of rate hikes that started in March 2022. The central bank’s benchmark rate is now in a range of 5.25% to 5.5% — the highest in 22 years.

Since the interest rate hikes began:

Credit card interest rates have risen from around 16% to 20.72% as of September — an all-time high, per Bankrate data.

Interest rates for new auto loans have increased from an average of 7% to 7.4%, the highest they’ve been in over 15 years, per Edmunds.

Federal student loan interest rates for undergrads have risen from 4.99% to 5.5% for the 2023-2024 school year, according to the U.S. Department of Education.

The phrase “higher for longer” has been the mantra of many economists, largely based on the Fed’s more recent projections. The effective federal funds rate is expected to stay close to 5% in 2024.

Currently, it’s a bit of a toss-up whether the Fed will end its rate hikes with another quarter percentage point increase before the end of the year, based on recent comments by bank officials.

“Too much cooling could tip the economy into a recession, so the Fed would likely prefer to watch developments unfold to the extent that they can,” says Kayla Bruun, senior economist at intelligence company Morning Consult. “Continued cooling in core inflation is enabling them to be patient.”

source: https://www.cnbc.com/2023/10/12/inflation-isnt-getting-worse-but-prices-will-remain-high.html