Economic Viewpoints
What’s Causing Higher Prices?
Inflation continues cutting into Americans’ budgets.
Why it matters: Understanding the true causes of inflation and price increases is crucial for consumers and policymakers to make informed decisions. Blaming businesses for "greedflation" is not only inaccurate but also ignores the underlying economic factors at play.
Details: Inflation is the result of supply and demand, particularly too many dollars chasing too few goods and services.
- During the pandemic, supply chain shocks and a tight labor market limited supply, and fiscal policy boosted demand. This created broad-based price increases.
- On top of that, monetary policy greatly increased the money supply.
Be smart: Businesses responded to changes in market prices. They did not cause them. Businesses must raise prices when input costs rise, or they see their margins shrink and start losing money.
Looking ahead: While the Federal Reserve continues fighting inflation by raising interest rates, policymakers can act by easing regulations, reducing tariffs, and increasing domestic energy production.
Bottom line: Don’t blame “greed” for inflation. There are clear and well-understood economic factors causing higher prices.
Job Market Still Tight
On Wednesday, the Fed raised its key interest rate from 5% to 5.25%, as expected, in part, because the job market remains incredibly strong. A tight labor market usually means upward inflation pressure.
Why it matters: A cooling economy should cause job openings to drop, but that is happening slowly.
Be smart: Businesses are still hiring at a strong clip and workers are still confident they can quit their jobs and find better ones easily.
By the numbers: The number of job openings remains near record highs.
- Job openings were 9.6 million at the end of March.
- That is down 384,000 from February.
- But there are still 3.75 million more openings than there are unemployed workers to fill them.
And: Quits remain at high levels.
- The quits rate was 2.5% in March. That is below the all-time high rate of 3%, but historically high.
- 3.9 million people quit their jobs in March, down from the 4.45 million all-time high in March 2022, also still historically high.
Looking ahead: The Fed is likely to pause interest rate hikes for at least the next few months. It will be closely watching the jobs market in that period to see if it is cooling as it determines what to do with interest rates going forward.
Consumer Prices Rise 4.9%
The Consumer Price Index, the broadest measure of consumer prices, rose 4.9% annually in April, slightly below the 5% reading in March. That is down from the peak of 9.1% in June 2022, but still very high.
By the numbers:
- On an annual basis, prices of necessities like electricity (8.4%), food at home (7.1%), and housing (8.1%) rose.
- Gas, despite the monthly bump up, declined on an annual basis (12.2%).
Be smart: This is a status quo report, which, given the persistently high levels of inflation, is bad news. Particularly concerning is that core prices remain above the rate of overall inflation.
- Housing prices are keeping core prices up, and they should ease later in the year, which should help take pressure off core price increases.
Looking ahead: The Federal Reserve is likely to pause interest rate hikes to give the rapid increase in rates time to work to bring prices down. But if core prices remain stuck around their current level, it will likely need to restart rate hikes to push it down.
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