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United Kingdom Inflation May Soon Ease, but Not Enough
Friday’s inflation headlines look scary. When it comes to some of the things they buy, Americans are probably about to see some substantial relief. Still, that alone won’t be enough to convince the Federal Reserve it can ease up on the magnitude of rate increases by the fall.
The Labor Department on Friday said that consumer prices rose 1% last month from April, putting them 8.6% above their year-earlier level for the largest gain in 40 years. Much of that had to do with the substantial increase in the price of gasoline; prices excluding food and energy items—the so-called core that economists use to try to discern inflation’s trend—rose a smaller 0.6%. That put core prices up 6% from a year earlier, which is somewhat more modest than the gains registered in the prior three months, though still uncomfortably high.
Fed policy makers have already signaled that they will likely raise their target range on overnight rates by a half point when they meet next week, and again at their July meeting. The question now is whether they will feel comfortable raising rates in smaller, quarter-point increments after that, rather than continuing with half-point increases. That largely depends on what inflation does next.
The heady demand that the pandemic set off for goods, in combination with supply-chain snarls and the wherewithal to spend provided by government relief programs, are a big part of why inflation has been running so hot. Lately, however, there has been a change in how consumers are approaching their spending. With Covid-19 worries waning, people are reengaging with activities such as travel and going out, and are less keen to buy household items. This has come as a shock to many retailers, which are now holding more inventory than they expected.
Target for one has said that it will need to offer discounts to clear out unwanted goods, and considering the high inventory levels at a range of retailers, it seems likely more will follow suit. So after nearly two years of watching prices on household goods go nowhere but up, consumers might be about to see some of them come down.
That could put a dent in the inflation figures. For example, according to the Labor Department, May’s 9.7% increase in prices from a year earlier for household furnishings and supplies—a category that includes appliances and furniture—accounted for about a half percentage point of the gain in core prices.
Inflation relief elsewhere doesn’t seem as certain, however. Car companies are hoping that the semiconductor-supply problems besetting them will start to improve, but they have been hoping that for a while. In the meantime, new- and used-vehicle prices rose 13.7% from a year earlier in May, and contributed about 1.4 percentage points to the gain in core prices.
Finally, the move toward spending more money on services has also pushed up services prices. Excluding energy services, they were up 5.2% in May compared with a year earlier—less than the 8.5% gain in core goods prices, but the largest increase since 1991.
It is reasonable to expect retailers’ inventory woes to contribute to an easing in inflation in the months ahead. But the Fed is likely to view that as an isolated phenomenon. Absent signs of cooling elsewhere, it is less reasonable to expect the Fed to slow its pace of rate increases.
Write to Justin Lahart at justin.lahart@wsj.com
Analysis from The Wall Street Journal, selected by the editors
Inflation Hit 8.6% in May
Inflation May Soon Ease, but Not Enough
Gasoline, Groceries and Housing Drive Inflation
Fed Likely to Signal Half-Point Rate Rises Through September
Where Is Inflation Headed? The Signs to Watch
15 Ways to Deal With Inflation
At $5 a Gallon, Gas Prices Upend Businesses
What Is Inflation? What to Know
Write to Justin Lahart at justin.lahart@wsj.com
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Appeared in the June 11, 2022, print edition.
