Tackling runaway inflation won't be easy and it won't be quick, and it may cost a lot.
The economy will have to slow down to stop 40-year high prices. Producers will have to get better at getting their goods to the marketplace. There will have to be a return to balance. Fixing all of that won't have much impact until the war is over.
Even under the best of conditions, a trend that has seen gasoline reach nominal new highs near $5 a gallon, the price of everyday foods like cereals, eggs and hamburger increase by double-digit percentages over the past year and housing costs push ever higher, will come down only intermittently, meaning
Sarah House described the downward trajectory of inflation as slow descent. A lot of inflation is driven by something called momentum. Slow moving is the way price setting is done. Companies don't always change their prices on a dime.
Friday's inflation report is expected to show only modest relief.
The consumer price index is expected to show inflation increasing at an 8.3% pace over the past year, the same as in April. Excluding food and energy prices, the core consumer price index is expected to grow at a slightly slower rate.
The monthly gains are expected to accelerate, with headline inflation expected to accelerate. The core is expected to be little changed, with a one-tenth point month-over- month decline.
The headline numbers will be looked at by economists to find trends in the components of the consumer price index.
Food and energy make up 22% of the index so any slowdown there will be noteworthy. 32% of the total is shelter costs. Services make up about 60 percent of the consumer price index compared to 40 percent for goods. Most of the inflation wave has come from goods.
It would be helpful to slow the economy. Some of the pressure would be taken off if demand growth was less than expected. It isn't just about a slow down. The composition's effects are important. There are areas that are more important. Spending could start to slow in goods inflation. A lot of the pressure points are located there.
The Federal Reserve wants to help that process by raising short-term interest rates, which had been stuck near zero as the economy recovered from the Pandemic.
The Fed is expected to keep raising its benchmark borrowing rate from the current range of zero to 1%.
The Fed might have more work to do.
A working paper released by the National Bureau of Economic Research suggests that the Fed could need to raise rates by a lot more to bring inflation down.
The last time inflation ran this fast was in the early 1980's. Inflation would last almost 40 years, until the current run-up, as a result of the Fed taking the funds rate up to 19%.
Inflation was running at 14.8% back then, so it won't be necessary to tighten that much.
The way in which it accounted for housing costs was the main reason for the change in the way it was calculated. It would take the same methodology to bring coreCPI to 9.1%, which is still ahead of the 6.2% reading in April 2022, but closer.
It will take the same amount of disinflation as achieved by Chairman Volcker to return to 2 percent core inflation.
President Biden wants to bring down inflation.
In a Wall Street Journal op-ed, Biden said he would fix supply chain problems and bring down the budget deficit, which is on track to be a fraction of that this year.
The president said that a lot of the heavy lifting has to be done by the Fed.
The primary role of the Fed is to bring inflation down, according to the Treasury Secretary. It's up to them how they do it.
Fed hikes take time to work through the system and economists will look at other factors until then.
Target and other retailers have recently said they will work to bring down excess inventory. Those moves won't make a big difference in the headline numbers because apparel has a 2.5% weight in theCPI.
Nicholas Colas wrote in his daily market note that if someone tells you that some retailers are discounting clothing, ignore them. It is possible for retailers to give away clothes for free.
The forces that led up to the current situation will need to be bled. It means a mix of lower growth, reduced strain on the labor market and a recipe of other things that will have to go right before relief comes.
House said it was not going to be easy. Consumer spending and business spending will keep the pressure on inflation.
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