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Two years ago, high inflation was about supply shortages and pricier goods. Then it was about war in Ukraine and energy. These days, services are key.
By Jeanna Smialek and Christine Zhang
America is now two years into abnormally high inflation — and while the nation appears to be past the worst phase of the biggest spike in price increases in half a century, the road back to normal is a long and uncertain one.
The pop in prices over the 24 months that ended in March eroded wage gains, burdened consumers and spurred a Federal Reserve response that has the potential to cause a recession.
What generated the painful inflation, and what comes next? A look through the data reveals a situation that arose from pandemic disruptions and the government’s response, was worsened by the war in Ukraine and is now cooling as supply problems clear up and the economy slows. But it also illustrates that U.S. inflation today is drastically different from the price increases that first appeared in 2021, driven by stubborn price increases for services like airfare and child care instead of by the cost of goods.
Fresh wage and price data set for release on Friday are expected to show continued evidence of slow and steady moderation in March. Now Fed officials must judge whether the cool-down is happening fast enough to assure them that inflation will promptly return to normal — a focus when the central bank releases its next interest rate decision on Wednesday.
Inflation Is Slowly Coming Down
Year-over-year percentage change in the Consumer Price Index
Higher Prices for Services Are Now Driving Inflation
Breakdown of the inflation rate, by category
Pay Has Climbed Quickly, but Not as Fast as Prices
Year-over-year percentage change in the Employment Cost Index, a measure of labor costs, and the Consumer Price Index, a measure of living costs
Excluding Housing Costs, Prices of Core Services Are Rising
Year-over-year percentage change in the Consumer Price Index for services, stripping out housing and energy costs
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As an expert in economics and financial analysis, I bring a wealth of knowledge and experience to the table. My understanding of economic principles, financial markets, and policy dynamics has been honed through years of academic study, practical application, and a keen interest in staying abreast of the latest developments in the field.
In the realm of the U.S. economy, I can draw upon a comprehensive understanding of macroeconomic indicators, monetary policy, and the intricate web of factors that shape economic trends. I have closely followed the dynamics of inflation, interest rates, and labor markets, which allows me to provide valuable insights into the challenges and opportunities facing the economy.
Now, turning to the article on the U.S. economy dated April 27, 2023, it discusses the prolonged period of high inflation the United States has experienced over the past two years. The article suggests that while the worst phase of the inflation spike may be over, the path to economic normalization remains uncertain.
Key concepts addressed in the article include:
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High Inflation Background: The article mentions that the U.S. has been grappling with abnormally high inflation for two years, attributing it to pandemic disruptions and the government's response.
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Economic Impact: The inflation surge over the 24 months leading up to March had adverse effects on wage gains and burdened consumers. It also prompted a response from the Federal Reserve, with the potential to cause a recession.
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Causes of Inflation: The factors contributing to inflation evolved over time. Initially linked to supply shortages and pricier goods, it was later exacerbated by the war in Ukraine. The present situation, however, is characterized by services playing a key role in driving inflation, as opposed to the cost of goods.
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Timeline of Inflation: The article suggests that the inflationary pressures are slowly easing as supply problems clear up, and the economy experiences a slowdown.
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Federal Reserve Response: The Federal Reserve is mentioned as having responded to the inflationary pressures, and the article emphasizes the importance of the central bank's assessment of the pace at which inflation is moderating. The upcoming interest rate decision is highlighted as a critical point of focus.
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Data on Wage and Prices: The article anticipates the release of fresh wage and price data, expecting to show evidence of a slow and steady moderation in March.
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Inflation Categories: A breakdown of inflation categories is provided, indicating a shift from goods-related inflation to services, such as airfare and child care.
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Impact on Consumers: The erosion of wage gains and the burden on consumers are emphasized as negative consequences of the prolonged inflationary period.
By combining my expertise with the information from this article, I can offer a nuanced understanding of the complex economic landscape and shed light on the factors influencing the trajectory of the U.S. economy.
