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Yes, Inflation Is Still High, but Not All Economic Indicators Are Dire

By Mark Wolf  |  August 16, 2022

You couldn’t blame inflation-wary economists for glancing wistfully back to that wonderful year 2015.

We streamed into movie theaters to watch the latest installments in the “Jurassic Park” and “Star Wars” franchises, and we danced to the No. 1 hit “Uptown Funk.” Inflation? Pretty much a big yawn. The rate stood at 0.7% and the talk among many economists was whether it should be nudged up 2% to ensure economic stability.

Today, with consumer prices having surged 9.1% in June before dipping to 8.5% in July, the Federal Reserve is wearing out the brake pads trying to rein it in with a series of interest rate hikes.

"Even though inflation has been running hot the last couple of years, it’s really been the last year when we’re hearing from households that they’re having more difficulty making their regular payments." —Nick Sly, economist, Federal Reserve Bank of Kansas City

“Even though inflation has been running hot the last couple of years, it’s really been the last year when we’re hearing from households that they’re having more difficulty making their regular payments,” said Nick Sly, assistant vice president and economist at the Federal Reserve Bank of Kansas City, during an NCSL Legislative Summit session titled “Economic Outlook: A Rocky Road Ahead?”

“This means mortgage payments, car payments, but it also means paying for food and we’re seeing that the inflation is starting to influence some of the decisions households are making and that businesses are having to respond to that.”

Inflation, he said, tends to come from the services that we purchase.

That includes leisure activities and hospitality, some professional and business services, along with travel and dining. “But actually a big component of it is shelter,” he said, “what we pay for our homes and to live in our homes (utilities). Early on that actually slowed, whereas goods, prices of cars, phones, computers were giving outsize continuations to inflation. We’re now in a position where the inflation pressures are much more broad-based.”

In addition, the economy still faces some supply-chain constraints, with demand exceeding current levels of supply.

Last June, he said, consumers were relatively able to meet their household expenses and close to 70% could weather an unexpected $400 expense. That has softened as families had to cover increases in food and fuel prices.

“It puts us in a unique position of having to curb price growth in a way we haven’t had to talk about in the last few decades,” he said.

Signs of Improvement

While inflation continues to run high, Sly said the economy is showing broad-based health in the labor market when measured by the unemployment rate. “Importantly, what you’re seeing is demand for workers is pretty strong, it exceeds what we see in that still-constrained labor supply,” he said. “Even if you didn’t have that shortage of workers and had all those folks previously participating back in the labor force, we would still have what would be perceived of as excess job demand. And that type of condition is when you start to see wage pressure and price pressures start to bubble up.”

Not all indicators are dire, he said. Debt burdens are at a historic low and many households took advantage of low interest rates to refinance or make first-time home purchases.

“Even though mortgage balances look to be quite high, if you look at how much it costs the average household to meet that expense, it’s at a historic low,” he said. At least through the first half of the year, 30-day delinquency is still quite low on home or car payments.”

What could make an economic recovery more difficult?

“A lot of the risks to U.S. economic growth are global in nature,” he said. “If you see slowdowns in emerging economies or in Europe, we often don’t see those affecting us, but when Russian invaded Ukraine, it hit us in a couple of hours. And let’s say something would happen to China and Taiwan.”

China’s zero-COVID policy, he said, could exacerbate supply chain issues, potentially affecting businesses looking to import goods from China.

“If you were to see the real conflict and human hardship that is hitting Ukraine spill over into Europe and the financial market, you could see that tipping financial conditions in the U.S.,” he said. “They can push us out of the scenario we’re in now where households have cash and businesses have cash. They’re able to weather the storm but that storm could get more difficult.”

Mark Wolf is a senior editor at NCSL.

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