As Fed fights inflation, recession fears grow

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"Investing lesson of the week," said The Wall Street Journal in an editorial: "Never trust a politician." Word out of the White House for weeks has been that "inflation is under control," and the markets took Washington's word for it. But last week's Consumer Price Index was a reality check: Inflation is still raging. Overall inflation seemed to rise only a little, to 8.3 percent. But that's deceptive, because gasoline prices dropped 10.6 percent; other prices went up across the board. Food costs are now "the biggest pain point for consumers," with grocery prices up 13.5 percent from a year ago. Core prices, which exclude food and energy, "also keep rising." The 6.2 percent surge in shelter costs for the year is the highest since 1983. It's no surprise that markets promptly suffered one of the worst weeks of the year on the release of the report, which confirmed that the Federal Reserve must continue its economic tightening.

With "markets reeling," the Fed has clearly gotten the message on inflation, said Davide Barbuscia and David Randall in Reuters. "Just months ago, investors worried the Federal Reserve was not fighting inflation aggressively enough." Now they are just as worried that the Fed will overshoot the mark and "plunge the economy into recession." The central bank this week issued its third consecutive three-quarter-point rate hike, and investors have also begun "pricing in meatier rate hikes down the road." While most of the economy still "appears to be humming along," delivery giant FedEx warned of a global economic stumble, and there may not be time for the Fed to gauge the full effects of its rate increases before they have gone too far.

The CPI numbers need to be put in perspective, said John Cassidy in The New Yorker. "In June, the headline inflation rate was 9.1 percent, so in two months it has declined by 0.8 percentage points." That's nothing to scoff at. The steady decline in fuel prices also "augurs well for anyone who buys food," since one of the factors influencing food costs is higher transportation costs. The slowdown we've seen in the housing market is also encouraging, because "buying will become a more attractive option, reducing demand for rentals." 

Picking out a few positive signs and saying they mean inflation will go away is wishful thinking, said Henry Olsen in The Washington Post. "President Biden rightly touts falling gas prices as an accomplishment," but "the money Americans save when filling their tanks simply goes out the door to pay for the food on their tables." There is no doubt that inflation will stick around as a major election issue. The CPI report "pretty much dashed" the hopes that the 2021–22 inflation surge would resolve harmlessly, said Paul Krugman in The New York Times. "There will, alas, be pain." The economy and labor market "are still running very hot," and we won't get inflation down until those change. The Fed's rate hikes will cause unemployment to rise, although economists differ on their predictions for how high it needs to go. "The truth is that nobody knows for sure."

This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.