MNI INTERVIEW: Fed’s Rich Says Inflation Set To Keep Falling

U.S. inflation is likely to keep coming down as lower rents filter through to consumer price measures and as moderating employment and wage growth take steam off a red-hot service sector, Robert Rich, director of the Federal Reserve Bank of Cleveland’s Center for Inflation Research, told MNI.

“We've seen pretty strong deceleration in goods inflation, so that is certainly a very good sign. All the new tenant rent measures are indicating a strong deceleration if not a decline, so even though it’s not showing up in the numbers right now we’re quite sanguine about the fact that we should see a slowing taking place in shelter inflation,” said Rich, also a senior economic and policy adviser at the Cleveland Fed and previously a New York Fed economist.

The third and thus far most stubborn component of inflation is core services ex-housing – the so-called supercore measure emphasized by Fed Chair Jerome Powell that is seen as closely linked to wage gains because of the labor intensity of the services sector.

“We’re seeing that moderate also. All of this is consistent with what the SEP and policymakers feel is this ongoing and steady decline that will be taking place in inflation,” Rich said in an interview. The Fed’s June SEP sees headline PCE inflation ending the year at 3.2% and core PCE at 3.9%. Further declines over the coming weeks could lead to downward revisions in the September SEP.

EXPECTATIONS RE-ANCHORED

Rich said his own new measure of inflation expectations shows a convergence of professional forecasters’ medium-run views on price pressures back down to the Fed’s 2% target after an unusual post-pandemic spike.

“Not only did you see this steady and then very dramatic rise during 2022, but then you saw an almost complete reversal or retracing during the first two quarters of this year,” he said.

“I think a lot of that had to do with those initial readings during the first part of this year that started to indicate a moderation in inflation. That was the element that we think was one of the principal sources for that retracing, that shifting back of those expectations back towards the target.”

The Fed’s preferred U.S. PCE inflation gauge weakened to 3% in June, the lowest since March 2021, while core PCE softened to 4.1%, down from 4.6% in May and the lowest since June 2021. CPI data for July is due out Thursday. (See MNI INTERVIEW: US Disinflation In Train But Economy Overheated)

BETTER BALANCE

The labor market remains hot but supply and demand appear to be coming into better balance as both monthly job gains as well as wage increases ease.

“The economy still seems to be quite strong. We would probably like to see just a touch more moderation there,” Rich said. “Labor markets seem to be getting better aligned so we’re making progress there. But there’s probably a little bit more that we could (see) on that front also.”

The July jobs report showed 187,000 new positions were created in net terms, along with downward revisions of nearly 50,000 jobs for the prior two months. Average hourly earnings rose by a still-robust 4.4% on a yearly basis, around the level where they started 2023 but down from a 2022 peak of nearly 6%.

The Fed raised interest rates sharply starting in March 2022, jacking up the federal funds rate from effectively zero to the current range of 5.25%-5.5% in less than 18 months, in the most aggressive hiking cycle since the 1980s. Officials are still divided over the need for additional tightening, although markets for the moment appear convinced the central bank is done.