After doing nothing when inflation started to shoot higher in 2021, the Federal Reserve has raised interest rates eight times in less than a year, by as much as three-quarters of a point at a time.
On Feb. 1, the Fed raised its benchmark rate by a quarter of a point, saying inflation has “eased somewhat.” After previously referring to the “pace” of future increases, the Fed’s latest statement says it hasn’t yet determined the “extent” of future increases.
That change in wording left open the possibility that central bankers could hit pause on additional rate moves in the months to come. Strong economic medicine evidently is giving way to “strongish” medicine.
In a news conference, Fed Chair Jerome Powell declared that “the disinflationary process has started,” even as he acknowledged it would be “very premature to declare victory, or to think we really got this.” Two days later, the complexity of the Fed’s task became yet clearer as the government reported robust hiring and a falling unemployment rate, even as wage growth cooled. Some of these weird numbers clearly are the result of the economy still adjusting to the new post-pandemic reality.
So here’s our message to Powell: Don’t wimp out.
We understand these rate increases can cause pain for everyday people. Higher interest rates raise the cost of borrowing via credit cards, mortgages, car loans and student loans. They also could slow the economy to the extent that millions lose their jobs in a recession.
Letting inflation continue to run rampant is even worse, though, and we’ve supported the Fed’s efforts so far to tamp down price increases. America can’t afford for its central bankers to turn into spectators again.
Prices are still going up for many everyday goods and services. While gasoline at the pump is down, other highly visible indicators are flashing red. Just get a load of the prices at the grocery store and local restaurants.
Food is as basic as it gets, and food prices are one of the most upsetting ways that Americans experience inflation. While commodity costs generally have moderated since the start of the Ukraine war sent them soaring last year, higher prices are here to stay for many products — from packaged groceries to takeout pizza.
Consumers have been forced to adjust their budgets accordingly. A survey by the Specialty Food Association shows that inflation prompted half the population to substantially change food purchasing habits in 2022. Some 50% of consumers said they were buying less expensive food, or “trading down,” as the survey termed it.
That’s happening even with the economy growing and wages on the rise in a surprisingly strong job market: The U.S. created 517,000 jobs in January, which doesn’t sound “deflationary” to us.
Higher labor costs are a factor in propelling food price increases, especially in Chicago and Cook County, which continue to raise minimum wages far above the national level. The list of pressure points also includes ongoing supply chain and delivery headaches, higher packaging costs and industry-specific problems such as the avian flu outbreak that has pushed up the cost of eggs.
The U.S. Department of Agriculture pegged food inflation at 9.9% for 2022, with food-at-home prices up 11.4% and food-away-from-home up 7.7%. For 2023, its analysts are forecasting food inflation at 7.1%, higher than the current 6.5% overall inflation rate for the consumer price index as of December.
That puts a lot of pressure on businesses making the thin profit margins that typify much of the food industry. Yasmin Curtis of Two Fish Distribution in Chicago, who owns a popular crab shack restaurant and distributes a related product line of seafood and sauces, is finding the old price points insufficient. “The margins are extremely thin,” she said in an interview. “I have no choice but to raise prices,”
Curtis also expressed a thought that no doubt has crossed the minds of many consumers feeling sticker shock when they buy anything from a fast-food meal to a loaf of bread these days: “I think some are just raising their prices to see if they can get away with it,” she said.
According to research from Harvard Business School, she’s on to something. Some companies are indeed raising prices by more than costs alone would justify.
Partly that’s because plenty of customers are willing to keep buying their favorite brand of breakfast cereal and the like even at higher prices. Remember, only half of consumers in that food industry survey said they were trading down to cheaper products. The other half presumably are biting the bullet and paying more.
Companies also raise prices by more than their costs when they believe those costs will keep rising. Expectations of future inflation can become self-fulfilling, as they did during the “stagflation” years of slow growth and rising prices during the 1970s and early ’80s.
Those were terrible years from an economic standpoint, and a long period of stagflation is a nightmare scenario for the Fed.
Central bankers, keep the pressure on until inflation is whipped.