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Fed’s Strategy Against Inflation Depends on Assuring Americans of Stabilized Prices

ByDayne Lee

Jan 29, 2024

Fed’s Strategy Against Inflation Depends on Assuring Americans of Stabilized Prices

Jan 29 – The US Federal Reserve’s (Fed) ongoing fight against inflation, marked by a recent decline towards its target with minimal job losses, has fostered a sense of victory. However, the real challenge lies in convincing individuals like Steve DelGiorno, a restaurant group owner in Danville, Virginia, that the era of rising prices is over.

Despite absorbing increased costs for items like paper cups and eggs, DelGiorno’s Crema Concepts LLC has struggled to maintain stable menu prices. He voices skepticism about the government’s inflation reports, finding them inconsistent with his experience of escalating costs for essentials like turkey and roast beef.

As the Fed convenes this week, expectations are for steady interest rates, though recent significant progress in controlling inflation has led some to anticipate rate cuts by March. The Fed’s target inflation metric rose 2.6% in December year-over-year, a considerable improvement from the 7.1% peak in 2022. Core inflation indicators have also softened, leading to lowered inflation expectations.

Nonetheless, the enduring impact of price shocks remains evident in consumer and business attitudes. While inflation has moderated, prices continue to rise, prompting Americans to adjust for inflation, real or perceived. This ongoing price sensitivity challenges the return to the decades-long stability that defined US price dynamics. Consequently, Fed officials signal no rush to reduce the benchmark lending rate.

Former Fed Chair Alan Greenspan defined price stability as a state where inflation is negligible in daily business and household decisions. Yet, the more than 19% increase in consumer prices over the past four years continues to influence American perceptions of inflation. Weekly surveys by Morning Consult show that consumers still expect a significant 5.8% income rise to maintain their current purchasing power over the next year.

According to Kayla Bruun, a senior economist at Morning Consult, while consumer attitudes have improved with better inflation numbers, a high level of price awareness persists. Michael Weber, an associate professor at the University of Chicago’s Booth School of Business, terms this “price nostalgia,” where consumers compare current prices with those of the past, reigniting inflation concerns.

This perception is compounded by ongoing price rises across various sectors. Despite growing consumer resistance, a December survey by the National Federation of Independent Business revealed that a net 25% of small businesses raised prices recently, with a third planning further increases in the next three months.

Richmond Fed President Thomas Barkin, a voter on monetary policy this year, emphasized the importance of monitoring business and consumer reactions to price hikes in the first quarter.

Businesses face ongoing cost pressures. Alfonso Wright, co-founder of Brooklyn Tea, is reluctant to raise prices but cites doubled costs for certain Chinese teas and a 30% increase in agave syrup prices over two years. He plans to raise prices in February, the first time in five years, reflecting his view that inflation is far from resolved.

Conversely, wage growth is showing signs of stabilization. John Waldmann, CEO of Homebase, a small business scheduling and payroll software company, reported steady wage rates in December after a 17% increase over the past two years. This moderation is crucial for price stability, aligning with what Fed officials have sought.

Determining the right timing for rate cuts as the economy edges towards stable prices is complex. Julia Coronado, founder of MacroPolicy Perspectives LLC, suggests that the Fed might need to cut rates before full price stability is achieved to avoid economic damage. She argues that while rates may need to stay elevated to outlast price nostalgia, they don’t necessarily have to remain at current levels.

The Fed’s battle against inflation hinges not just on statistical targets but also on shifting the public’s entrenched perceptions of ongoing price increases. This task involves navigating the delicate balance between maintaining necessary monetary controls and ensuring economic growth, a challenge that continues to define the Fed’s policy decisions in this complex economic landscape.

Featured image credit: Deemerwha studio via Adobe Stock

Dayne Lee

With a foundation in financial day trading, I transitioned to my current role as an editor, where I prioritize accuracy and reader engagement in our content. I excel in collaborating with writers to ensure top-quality news coverage. This shift from finance to journalism has been both challenging and rewarding, driving my commitment to editorial excellence.