Higher Inflation May be Here to Stay Despite Consumer Price Increase Through April a 2-Year Low
The Consumer Price Index for All Urban Consumers (CPI-U) reversed directions in April 2023, rising 0.4 percent on a seasonally adjusted basis, after increasing 0.1 percent in March according to the latest news release by the Bureau of Labor Statistics (BLS). The index for shelter continues to be the largest contributor to the monthly all items increase as consumer prices in 2023 through April rose to 4.9%; and although the lowest in two years, and down substantially from 9.1% in June 2022, it remains significantly higher than the Federal Reserve’s 2% inflation target. Core inflation, which excludes food and energy and is the preferred indicator among economists of underlying inflation, inched down from the previous month’s 5.6% to 5.5% in April. Looking back, the “pandemic and war-related disruptions to the supply of goods, services and labor,” along with “federal stimulus and near-zero interest rates that stoked demand” fueled the original surge in inflation; and although in theory two years ago it was anticipated that “once these transitory supply and demand factors receded, inflation would return to 2%.” However, what may already be underway is the risk of people adjusting to faster rising prices and wages that could ultimately make them self-sustaining because of the longer span of time it took for these transitory factors to subside — a caveat the theory always carried; and once inflation settles at a higher steady-state rate, wages and prices rise together — a situation that some believe could take a deep recession to get inflation down, contrary to the Fed’s theory that slow economic growth and not a recession should be enough to return inflation to 2%.