Inflation eased slightly in April, showing some of the slowest gains since last summer, although it remains at a 40-year high and has a long way to fall before Americans feel relief.
Inflation is the biggest strain on the economy and comes as the recovery is being compromised by trouble spots including slower manufacturing activity, an unsustainably tight job market and less robust economic growth. Higher prices, and the Federal Reserve’s plans to raise interest rates in response, are also fueling recession fears and dampening financial markets, which remain down for the year.
While it’s hard to draw sweeping conclusions from one inflation report, April’s data could help clarify the direction of economic head winds, said Betsey Stevenson, an economics professor at the University of Michigan who served on President Barack Obama’s Council of Economic Advisers. For example, a key way prices will come down is if people start spending money again on things such as dining out, salon services and travel, instead of buying items such as furniture and cars.
“The economy is in a really unusual place, because we’ve just had so many industries that have been fundamentally impacted by covid,” Stevenson said. “Demand shifted from services and toward goods in a way we predict is going to reverse, but we don’t know for sure.”
There are still bright spots in the economy, including strong consumer spending and a labor market that has lifted wages and given workers more leverage to negotiate with employers on benefits. But that message has been hard to get across for the White House as inflation becomes the dominant political liability.
“While it is heartening to see that annual inflation moderated in April, the fact remains that inflation is unacceptably high,” President Biden said in a statement Wednesday. “As I said yesterday, inflation is a challenge for families across the country and bringing it down is my top economic priority.”
The costs of shelter, food, airfare and new vehicles were the largest contributors to April inflation. The food index increased 0.9 percent in April compared with March, notching its 17th consecutive monthly increase. The dairy index climbed 2.5 percent, its largest monthly increase since July 2007. Airfare rose sharply, increasing 18.6 percent in April, the largest one-month increase since the category was first tracked.
Also giving pause is “core” inflation, which strips out the more volatile food and energy categories. It rose more than expected in April — climbing 0.6 percent, compared with 0.3 percent in March. Fed officials often look to core inflation to understand how inflation is behaving across the entire economy. The pickup tells policymakers that rising prices are increasingly widespread and will be that much harder to get under control.
A key example of this challenge is rent prices, as costs picked up speed in April, rising 0.6 percent compared with March, which is worrisome because housing costs drive inflation throughout the economy. Shelter accounts for about one-third of the basket of goods and services used to measure the consumer price index. If housing costs don’t slow down soon, it will be harder for overall inflation to return to more normal levels.
The cost of medical care increased 0.4 percent in April. Hospital services rose 0.5 percent over the month.
While the war in Ukraine sent energy and gas costs soaring, April data included an encouraging turnaround. The energy index dropped 2.7 percent in April, after jumping 11 percent in March. The gasoline index also fell 6.1 percent, after rising 18.3 percent in March. (Still, compared with last year, the energy index is up 30.3 percent and the gasoline index increased 43.6 percent.)
The index for used cars and trucks also fell 0.4 percent over the month, its third straight decline after an extended run of increases.
High inflation has been a scourge on a recovery that has been strong by many other measures, hurting the president’s approval ratings and intensifying pressure on the Fed. It has also tested Americans’ ability to handle more expensive rent, groceries or gas, with little sense of when the strain will ease.
Douglas Holtz-Eakin, former head of the Congressional Budget Office and the president of the conservative American Action Forum, said that the inflation rate, when measured from the beginning of Biden’s presidency to last month, is even higher, especially for essentials such as food, energy and shelter.
Holtz-Eakin said he isn’t as worried as other economists about an immediate recession, unless the Fed slows the economy too aggressively, but for now, people’s experiences will shape their approval of officials in Washington.
“Presidents get blamed for what’s happening on their tenure,” Holtz-Eakin said. “That is what you’re seeing in the polling.”
Indeed, families and small businesses continue to point to inflation as a top concern. In the Boston area, practically everything is more expensive for Clevergreen Cleaners, owner Farshad Sayan said. The price of a five-gallon container of solvent went from around $90 to $800. Sayan can’t find an electrician to service equipment for less than $400. He has had to raise his prices by 15 to 20 percent, in part to cover higher wages for employees.
He hopes it’s enough to keep his own business running, especially since so many other cleaning businesses didn’t make it through the coronavirus pandemic. He also wonders about his customers’ ability to absorb the higher prices.
“Ordinary folks that have limited income — they do not necessarily get a cost of living increase, or they don’t have a lot of funds that are discretionary,” Sayan said. “So it’s ‘Do I put fuel in my car to commute, or put food on my table, or do I not clean my pants and shirts for another two or three wears?’ ”
In Atlanta, Rachel Reynolds, director of marketing at Atlanta Mission, a homeless shelter, said rising prices are routinely cited as a top reason people seek help. The shelter serves about 800 men, women and children every day, and its food costs are projected to double this year. To save on the cost of staff and space, the organization consolidated operations and cooks meals out of one kitchen.
“A lot of the patterns I’ve seen, regarding the pandemic, are that it has caused financial stress,” Reynolds said. “We have people who weren’t able to make rent, weren’t able to pay for child care or the cost of living. Clients we see are on fixed incomes. A lot are saying they can’t pay their bills.”
The government’s main tool to combat inflation rests with the Fed, which can raise interest rates to make various loans more expensive. Higher lending costs tend to cool the economy by weighing on business and consumer spending, and eventually lead to lower prices overall.
The Fed has launched a plan to slash inflation with seven interest rate increases this year. The Fed approved the second of those increases last week, opting for a more aggressive half-percentage point, the sharpest jump since 2000. Fed Chair Jerome H. Powell said similar increases would be coming in the next few months.
But even as Fed policymakers race to control inflation and cool the economy, the path is tricky. Interest rates that rise too much and too fast could force the economy to contract altogether, sending the country into recession and prompting layoffs.
Plus, Fed rate increases can’t build houses. David Dworkin, president and chief executive of the National Housing Conference, said he doesn’t expect home prices to meaningfully fall, because the country is short about 3 million to 5 million homes, and builders are going to be hard-pressed to keep up if borrowing costs and construction costs keep rising. He estimates that the cost of the monthly mortgage payment on a typical single-family home goes up about $200 per month for every one-point rise in mortgage rates.
“It may slow the increase in inflation, but because it also increases the cost of badly needed housing production, it may not cut inflation,” Dworkin said. “So you could be creating a lot of economic pain and not getting the result.”
Inflation has risen significantly faster than the Fed or White House expected, despite warnings from prominent economists including former treasury secretary Lawrence H. Summers, and Republicans who hammered the Fed for being behind the curve. Fed leaders have long responded by saying they made the best choices they could with the data available.
Now they are increasingly having to answer for whether they were too slow to boost rates or start cutting other supports for the economy, a process known as tapering. With hindsight, for example, it became clear that the government dramatically underestimated job growth in 2021.
“As the revisions came in, a consensus grew that the labor market was much stronger than we originally thought,” Fed governor Christopher Waller said in a speech last week. “If we knew then what we know now, I believe the Committee would have accelerated tapering and raised rates sooner. But no one knew, and that’s the nature of making monetary policy in real time.”