The consumer price index (CPI) cooled for a seventh consecutive month in January, but came in slightly higher than expectations — a sign that the path to lower inflation sought by the Federal Reserve may not be a straight shot.
The Fed is trying to decipher mixed signals in the economy, such as why inflation is dropping amid a historically strong job market. Economists have been focusing on narrower slices of inflation such as in the service sector excluding housing, in order to single out the remaining causes of high price growth.
But for regular Americans, the pain of inflation is still most acute in the headline categories of energy and especially food, which are both outpacing core CPI and forcing people to reset their expectations about what they can afford as consumers.
Inflation “is making me have to change my food planning completely, because I have to drop down in the quality of the products that I’m using for my kids. This is an issue because I don’t like to use a lot of processed food items,” Kianna Quann, a front-of-house manager at City Cafe Diner in Chattanooga, Tenn., told The Hill in an interview.
“I don’t like to use a lot of GMOs [genetically modified organisms], and I try to stay on the natural side with a lot of fruits and vegetables. But it makes it so you’re almost forced to do more processed food because that’s the last thing to go up in price,” she said. “You have to fill up on things that aren’t as healthy.”
Rising food costs
The price of food across the country is 10.1 percent higher than it was a year ago, Tuesday’s CPI numbers show. That’s compared to a rise of 5.6 percent in core inflation, which removes the categories of food and energy and which economists view as a better predictor of longer-term inflation.
Grocery prices, which are reflected in the Labor Department’s food-at-home category, are up 11.3 percent since last year. The food away from home category, which covers restaurant and cafeteria meals, is up 8.2 percent annually.
“Even if you live a basic lifestyle, you just can’t really afford to live like you were before,” Brooke, who works the front desk of the YMCA in Greenwood, S.C., and declined to share her last name, told The Hill.
Brooke said she feels more stressed because of higher prices and that she’s had to scale back her social life in order to save money.
“My friend group that I hang out with, we try to do things now that involve just going to somebody’s house to hang out. We don’t really go out as much as we used to because we can’t afford to do that every weekend. It’s just gotten too expensive,” she said.
The Fed fights back
To bring down prices, the Fed has been raising interest rates for nearly a year, pulling them up to between 4.5 and 4.75 percent from zero percent in the immediate aftermath of the coronavirus pandemic. Higher rates make it more expensive to transact through the economy, which decreases demand for goods and services and eventually lowers prices.
The downside is that as higher rates slow down economic activity, they can tip the economy into a recession. Many economists are predicting a recession to occur at some point this year, and the Fed’s latest summary of economic projections released in December puts the unemployment rate for 2023 at 4.6 percent — more than a full percentage point higher than its current level.
Not all economists think this trade-off is worth it.
“Inflation has fallen for seven straight months and the labor market continues to be relatively strong. It’s increasingly clear that we don’t have to manufacture mass joblessness and economic devastation to bring down prices. The Fed should stop trying to do just that,” economist Rakeen Mabud of the progressive policy organization Groundwork Collaborative said in a statement on Tuesday following the release of the CPI.
The job market is defying gravity
So far, the job market has been withstanding the pressure of the Fed’s rate hikes. The U.S economy added 517, 000 jobs in January, a stunning haul, and pushed the unemployment rate down to 3.4 percent — its lowest level since 1969.
That’s translating into favorable conditions for workers, with nearly two job openings in the economy for every job-seeker.
“At the moment, it’s hard finding anyone that is wanting to work. There’s been a lot of people quitting. And when you do find someone to hire lately, they don’t stay,” Ashtin Grogan, a manager at a Sonic fast food restaurant in Cabool, Mo., told The Hill in an interview.
Grogan said that business has been slower than usual recently. She blamed the initial drop-off on winter storms that hit the central region of the country, but noted that customers haven’t been quickly returning.
“Meat and dairy prices [are higher],” she said. “Chicken a little, but mostly I’d say burgers and our ice creams and stuff. And I would say drinks, as well.”
The economy and inflation were top issues for American voters during the 2022 midterm elections, according to exit polling, and President Biden has said his administration’s top economic priority is bringing down prices, a message he repeated Tuesday after the release of the CPI.
“Inflation in America is continuing to come down, which is good news for families and businesses across the country. Today’s data confirm that annual inflation has fallen for seven straight months. Inflation for food at the grocery store came down again last month. Gas prices are down about $1.60 from their peak last year,” he said in a statement.
But Biden also acknowledged there was “more work to do” to lower price levels — a possible nod to the Fed as it prepares more rate hikes to further slow the economy and the president’s ambitious plans to tackle other troublesome costs.
“There is still more work to do as we make this transition to more steady, stable growth, and there could be setbacks along the way. That is why my unwavering focus is on continuing to lower costs for families,” Biden said.