Inflation, as measured by the Consumer Price Index (CPI), rose 0.5% in January 2023, up 6.4% from January 2022, according to data released by the Labor Department on February 14, 2023. Despite recent optimism from some analysts, persistent inflation continues to impact the economy, American consumers, and federal economic policy.
Inflation is still running hot.
The Producer Price Index (PPI) also increased in January 2023, by 0.7%. Economists surveyed by Dow Jones had previously anticipated a 0.4% increase. The CPI increase also exceeded the expectations of economists surveyed by Dow Jones, who had predicted a month-over-month rise of 0.4%.
Rising inflation has been occurring for longer than previously reported. On February 10, 2023, the Labor Department revised the CPI data from December 2022 to a gain of 0.1% rather than the previously stated loss of 0.1%.
The direction inflation will take moving forward is a matter of debate among economists, but many foresee inflation remaining high. Neil Dutta, an economist at the research firm Renaissance Macro Research, told The Wall Street Journal that people who predict inflation to slow down have “a huge reluctance to admit the obvious, which is that the economy is reaccelerating, full stop.”
The Federal Reserve’s policy response to increasing inflation may be strict.
On February 13, 2023, Federal Reserve Governor Michelle Bowman said the central bank will likely continue to raise interest rates, stating, “I expect we’ll continue to increase the federal funds rate because we have to bring inflation back down to our 2% goal, and in order to do that, we need to bring demand and supply into better balance.”
Economists Mohamed El-Erian, chairman of Gramercy Funds, and Kenneth Rogoff, a professor at Harvard University and former Federal Reserve economist, both believe the Federal Reserve will have a difficult time achieving its 2% inflation goal. El-Erian predicted that inflation will be “stuck at 3% to 4%, and the Fed keeps promising us 2% in the future, and hopefully we learn to live with stable 3% to 4% inflation.”
Gang Hu, managing partner at New York hedge fund WinShore Capital Management, predicts that it will take a year before either slowing inflation rates or economic pressure will lead to interest rates reversing course.
The effects of both inflation and Federal Reserve policy are mounting.
A strict Federal Reserve response to rising inflation may have negative economic consequences. Dominique Dwor-Frecaut, senior strategist at Macro Hive, told Bloomberg TV in a February 14, 2023, interview, that the Federal reserve’s policies would be “an enormous shock for the market.”
Inflation has also chipped away at Americans’ savings. Fox Business reported on February 9, 2023, that inflation led to many Americans taking out hardship loans on their 401(k)s and racking up credit card debt.
Persistent inflation continues to impact the economy and may lead to long-term effects on consumer portfolios.
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