The latest inflation data is unlikely to rattle the Federal Reserve, which is charged with keeping prices stable and unemployment low. Fed leaders have argued for months that a rise in inflation will be temporary, and that prices will simmer down as the economy reemerges from the pandemic. Rather than rush to raise interest rates and slow down the recovery, the Fed is urging patience so that the labor market has time to recover.
In April Americans’ after-tax income slid 15.1 percent from the record level it hit in March, when hundreds of billions of dollars in stimulus payments goosed U.S. bank accounts, after adjusting for inflation. In March, income had jumped an eye-popping 22.7 percent compared with February. So while after-tax income slipped in April, it has trended upward in the longer run, as stimulus checks and unemployment benefits continued to arrive in April but at lower levels.
Powered in part by this government-assisted income surge, consumer spending recovered completely from the coronavirus crisis in March, after adjusting for inflation. Consumers account for almost 70 percent of the U.S. economy and their spending whims have long powered U.S. economic growth.
But while consumers are finally shelling out just as much per month as they did before the recession, spending in April 2021 looks very different than it did just 14 months earlier, before the crisis. Spending on goods — from private planes to window panes — recovered within a month or two and has been in record territory ever since.
Spending on services, such as parking fees and surgeries, rose 0.6 percent in April from the previous month but remained 4.7 percent below its prepandemic level as fears of the virus remain widespread and some high-traffic brick-and-mortar firms struggle to regain their footing.
Yet there are signs for optimism. Julia Coronado, president of Macropolicy Perspectives and a former Fed economist, said the gradual shift back toward services spending will help the economy find its footing. Workers in service-sector jobs will keep going back on the payrolls, and pressure will ease on the “overheated goods sector,” where supply-chain backlogs triggered higher prices.
“People are going to the dentist, getting their hair done, re-upping their gym memberships, going out to eat and taking vacations,” Coronado said. “It is a transition that will take all summer though and the Fed will be patient to see the recovery through to where it is more balanced and can better stand on its own.”
A few weeks ago, a different measure of inflation, the consumer price index showed an even higher inflation figure: 4.2 percent. That index tends to be higher than the figure in Friday’s release, which is the measure of inflation watched most closely by the Federal Reserve.
The two measures are similar, and both indexes calculate prices based on a bucket of goods. But the baskets aren’t identical and some prices of goods get heavier weights than others.
The consumer price index released earlier this month is based on a survey of what households buy, while the figures released Friday are based on surveys of what businesses are selling. Furthermore, the consumer price index captures only out-of-pocket expenses and wouldn’t reflect costs that aren’t paid for directly, like medical care covered by insurance or Medicaid. Those costs would be included in Friday’s data.
The surge in both indexes was due in part to their point of comparison: Last April, prices and spending plunged as the nation locked down in fear of the novel coronavirus. In comparison to that unusual low, economists say, it is not surprising that this April’s numbers look unusually high.
Fed Chair Jerome H. Powell and others give a few reasons for why inflation is on the upswing, and why the Fed isn’t worried about bringing it down too soon. Consumer demand for goods and services — from airline tickets to restaurant reservations — is rebounding as people unleash pent-up savings. Meanwhile, the supply side of the equation is struggling to catch up. Those bottlenecks are expected to ease as factories ramp back up to full capacity and workers come back on the payrolls. But it won’t happen right away.
Economists also expect inflation figures to taper off in the year to come, as the super-low readings from the pandemic’s early days shift out of the calculation.
The Biden administration also expects that inflation will rise over the coming months before tapering off to more sustainable levels. On Thursday, Treasury Secretary Janet Yellen said that “as the economy gets back online it’s going to be a bumpy process.”
“I don’t think this is endemic inflation,” Yellen said.
Many Republicans disagree with the Fed and White House. They argue that the Fed will be behind the curve once it decides inflation has climbed too far past its annual 2 percent target. The GOP also blames overspending from the Biden administration for overheating the economy.
Former treasury secretary Larry Summers, an early critic of the administration’s stimulus plan, also doubled down on his inflation concerns this week. In a Washington Post op-ed, Summers wrote that “the primary risk to the U.S. economy is overheating — and inflation.”