After two years of interest rate hikes, inflation has seemingly been tamed, according to some experts.
Year-over-year prices have receded to a rate of 2.9%, according to the latest consumer price index report, which measures the cost of everyday goods and services.
This suggests that while prices for things like rent, groceries and services will remain high, they aren’t accelerating like the were two years ago, when inflation reached a peak of 9.1% in June 2022.
While the latest reading is still short of the Federal Reserve’s target rate of 2%, the last time inflation was this low was March 2021.
It’s “time for the Fed to declare ‘mission accomplished,'” says Julia Pollak, labor economist at ZipRecruiter, who argues the central bank should start cutting interest rates in September.
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To combat inflation, the central bank enacted 11 consecutive interest rate hikes between March 2022 and July 2023, raising its effective benchmark rate from near zero to 5.33%. Since then, the Fed has held interest rates steady.
Rate hikes help curb inflation by making borrowing more expensive, but they can also slow down economic growth. They can make things worse for consumers as well, by increasing the costs of mortgages, credit cards and other loans. Additionally, they can discourage business investment, leading to fewer jobs and slower hiring.
“If the Fed keeps its foot on the brake pedal, the labor market will continue to slow,” says Pollak about current interest rate levels. A rate cut of at least 25 basis points is widely expected in September.
Why the report might be better than it looks
Shelter costs stayed relatively high, increasing by 0.4% last month, contributing to nearly 90% of the overall inflation, according to the latest report.
However, a quirk in how shelter costs are reported in the CPI means it can take a few months for changes in prices to show up, so current pricing might not be in the most recent report.
While you can’t understate how rising housing costs over the past few years has impacted people’s wallets, home and rent prices have stalled in recent months, suggesting that the deceleration could show up in future reports.
The more recent data “suggests market rents are already well into the normalization process. This means the CPI will continue to show further disinflation within shelter costs well after the Fed enacts its first few cuts to the federal funds rate,” says Noah Yosif, chief economist at the American Staffing Association.
That said, a longstanding shortage of homes has been the biggest factor in why housing costs keep increasing. For that reason, they are “notably insensitive to restrictive monetary policy,” says Pollak.
“The Fed should step back and allow the market and policymakers to address the ongoing issue of housing undersupply,” she adds.
Pollak goes on: “In many ways, high interest rates have made the [housing] problem worse, with rate lock trapping homeowners in their homes and encouraging older Americans to age in place, and high rates discouraging real estate investors from taking out loans to finance the construction of houses and apartments.”
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