A ‘Rocky and Bumpy’ Economy Where Wages Are Up and Inflation Persists

The inflation rate is lower than it was in the previous year. The job market hasn't been as active. The economy is slowing. The economy is slowing down.

On Friday, a series of government reports painted an image of a slow-moving economy, which is in general heading in the right direction, but takes its time getting there.

Megan Greene is the chief economist at Kroll Institute. She said, "We knew inflation would be bumpy and rocky." "We've found the peak in inflation, but there won't be an easy path back down."

Commerce Department reported Friday that consumer prices rose 4.2 percent from a year ago in March, according to Personal Consumption Expenditures Index, the Fed's preferred inflation measure. The Commerce Department reported Friday that consumer prices were up 4.2 percent in March compared to a year earlier, according to the Fed's preferred measure of inflation, the Personal Consumption Expenditures index.

After removing food and fuel, the closely-watched "core" index remained nearly unchanged last month. This measure increased by 4.6 per cent over the past year, up from 4.7 per cent in the previous reading.

The Fed is likely to be concerned about the rapid rise in wages, which is good for workers who are trying to keep pace with rising costs of living.

The Labor Department released data on Friday showing that salaries and wages for workers in the private sector were up by 5.1 percent from a previous year. This was the same rate of growth as December and surprised forecasters who expected a slight slowdown. In the first quarter, a broader measure of compensation, which includes benefits and pay, showed a slight acceleration.

Since more than a month, the Fed has raised interest rates to try to cool the economy and reduce inflation to the target of 2% per year set by the central bank. The Friday data is likely to reinforce policymakers' belief that their work isn't done. Officials are widely expected next week to increase rates by a quarter of a percentage point to just over 5 percent. This would be the 10th consecutive increase in interest rates by the central bank.

The Fed is particularly interested in wage data. They believe that a labor market with more jobs available than workers can fill is driving up wages at an unsustainable pace, which is contributing to inflation. Other measures indicated a greater slowdown in wage increases than the data released on Friday. Although less timely, they are generally regarded as more reliable.

Omair Sharif of Inflation Insights wrote to his clients in a Friday note that if any Fed officials had been hesitant about a rate hike for May, "the wage data will likely push them towards supporting at least one additional hike."

What happens next is the key question. In March, central bankers predicted that they would stop raising interest rates following their next move. Jerome H. Powell could clarify if this is still true after the Fed's announcement of rates next week. The decision will depend on the incoming financial and economic data.

Investors shrugged off Friday's data, instead focusing on a series of strong profit reports from the past week that indicate corporate America is yet to feel the full impact of rising interest rates. In midday trading, the S&P 500 index grew by 0.5 percent. Treasury bond yields, which measure the cost of borrowing more money by the government and are sensitive to changes to interest rate expectations, have fallen slightly.

The Fed has a difficult task in trying to raise borrowing rates just enough to discourage companies from hiring new employees and to ease the pressure on wages, but not too much to cause them to lay off workers in masse.

The higher interest rates are already having an impact on the housing market, manufacturing, and business investments. The Commerce Department's data on Friday indicated that the consumer -- the engine for the current economic recovery -- is beginning to falter. Consumer spending grew strongly in January but barely in February, and was flat in march. Americans have been saving their income at a higher rate than ever since December 2021. This could be a sign of consumers becoming more cautious.

Stephen Juneau is an economist with Bank of America.

Many experts believe that the recovery is likely to continue slowing in the months to come -- or has already slowed. Data from March doesn't capture the full effect of the collapse and financial turmoil of Silicon Valley Bank.

Gregory Daco is the chief economist of EY, formerly known as Ernst & Young. He said that real-time information on business investments, credit standards, and spending would paint a different picture than the one given by first-quarter figures.

Fed officials are challenged by the fact that they can't wait to have more complete data before making decisions. Some evidence suggests a slower economy, while other evidence indicates that consumers are still spending and companies are raising prices.

Brian Niccol said, "If inflation warrants that we need to increase our prices, we will do it," during a Chipotle earnings call held this week. "I believe we have now proven we have pricing power." Chipotle raised its menu prices 10 percent over the first quarter of last year.

The Fed faces a difficult issue in wage growth. The Fed has had to deal with a particularly difficult issue: wage growth. Most economists both inside and outside of the Fed say that wage growth is not the main cause of recent high inflation.

Fed officials are concerned that companies will need to raise prices if they want to continue raising wages. This could make it difficult to control inflation even after the disruptions of the pandemic era that initially caused the price spike have subsided.

Cory Stahle is an economist at the job site Indeed. "It's always nice to get a bigger paycheck," he said. It's also bad to pay $5 per dozen eggs at the grocery store.

Joe Rennison has contributed to the reporting.