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US inflation may have fallen from a 40-year high last month

WASHINGTON – After a year of rising prices for gas, groceries and other necessities, inflation may have eased slightly in April from a 40-year high, the first slowdown in seven straight months of deteriorating inflation.

The government is expected to report on Wednesday that consumer prices rose 8.1% year-on-year last month, according to a survey of economists by data provider FactSet. That would be less than the 8.5% year-over-year increase in March, the highest since 1981.

The projected fall in annual inflation, if it materializes, would add to further signs that consumer inflation may finally be peaking. Month-to-month price increases are also easing, along with some other indicators of inflation.

Still, April’s rate would still represent the second-highest inflation in four decades and an ongoing burden on families, especially low-income Americans. And it would be just a modest step on what will likely be a long and arduous journey back to the benign 2% inflation target that the Fed has set. Many economists expect annual price increases to settle in a range of 5% to 6% by the end of the year, a historically high level that is likely to exceed average wage increases.

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“It’s too early to call a win,” said Jose Torres, senior economist at Interactive Brokers. “It’s not getting worse, but it’s still at an uncomfortably high level.”

Aside from the financial strain on budgets, inflation poses a serious political problem for President Joe Biden and Congressional Democrats in the mid-election season, with Republicans arguing that Biden’s $1.9 trillion financial stimulus package last March has overheated the economy by flooding it with increased stimulus checks, unemployment benefits and child tax allowances.

Biden tried to seize the initiative on Tuesday, declaring inflation “the #1 problem facing families today” and “my top domestic policy priority.”

Biden blamed chronic supply chain snarls related to the rapid economic recovery from the pandemic, as well as the Russian invasion of Ukraine, for igniting inflation. He said his government will help mitigate price hikes by shrinking the government’s budget deficit and encouraging competition in industries like meatpacking, which are dominated by a few industry giants.

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Still, fresh disruptions overseas or other unforeseen problems could keep pushing US inflation to new highs. For example, if the European Union decides to cut off Russian oil, gas prices in the United States would likely accelerate. China’s COVID lockdowns are exacerbating supply problems and hampering growth in the world’s second largest economy.

Earlier signs that US inflation might be peaking did not hold up. Price increases slowed last August and September, suggesting at the time that higher inflation could be temporary, as many economists – and Federal Reserve officials – had suspected. But in October, prices shot up again, prompting Fed Chair Jerome Powell to shift policy toward higher interest rates.

This time, however, several factors are pointing to a peak in inflation. Gas prices, which had skyrocketed in March following Russia’s invasion of Ukraine, fell on average in April, likely slowing inflation. Used car prices are also expected to have fallen over the last month. Automaker supply chains have unraveled somewhat and new car sales have increased.

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Another factor will be how sharp price increases from a year ago affect the new inflation calculations. Prices of many goods rose last spring as the economy reopened and a surge in demand overwhelmed supply. But this year, monthly price increases for many commodities have slowed. This could cause the inflation rate to fall year-on-year.

Furniture costs, for example, were up 1.8% in March 2021 alone and 2.1% the next month. But this March, furniture rose just 0.6%, potentially lowering year-over-year inflation.

Excluding the particularly volatile food and energy categories, economists have forecast so-called core prices to have risen 6% in the 12 months to April, compared with 6.4% in March. That would be the first such slowdown since August. Headline inflation is also likely to have slowed from March to April.

While food and energy have suffered some of the worst price spikes of the past year, analysts often watch the core numbers to get a feel for underlying inflation. Core inflation also tends to rise more slowly than headline inflation, but may also take longer to decline. Rents, for example, are rising at an all-time high, and there’s little sign of this trend reversing anytime soon.

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The unexpected persistence of high inflation has prompted the Fed to begin what may be its fastest streak of rate hikes in 33 years. Last week, the Fed raised its short-term interest rate by half a point, the largest hike in two decades. And Powell signaled that more such sharp hikes are to come.

The Powell Fed is attempting the notoriously difficult — and risky — task of cooling the economy enough to curb inflation without triggering a recession. Economists believe such an outcome is possible, but unlikely with such high inflation.

Meanwhile, in some ways, Americans’ wages are rising at their fastest pace in 20 years. Their higher pay allows more people to keep up, at least in part, with higher prices. But employers typically respond by charging clients more to cover their higher labor costs, which in turn increases inflationary pressures.

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Last Friday’s jobs report for April included hourly wage data that suggested wage increases were slowing, which if sustained could help ease inflation this year.

Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, transcribed or redistributed without permission.

https://www.local10.com/business/2022/05/10/us-inflation-might-have-dipped-last-month-from-40-year-high/ US inflation may have fallen from a 40-year high last month

Justin Scacco

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