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Recession Looming?

Thursday, May 11, 2023   /   by Darcy Miller

Recession Looming?

In April, consumer prices in the United States experienced another increase, while measures of underlying inflation remained elevated. This indicates that any further decreases in inflation are likely to occur slowly and with challenges. 

According to the government's report on Wednesday, prices rose by 0.4% from March to April, which was higher than the 0.1% increase observed from February to March. On a year-over-year basis, prices rose by 4.9%, slightly lower than the increase seen in March. 

Although the nation's inflation rate has been gradually declining since its peak of 9.1% in June of last year, it still remains significantly above the Federal Reserve's target rate of 2%.

Regarding everyday consumer items, the inflation report on Wednesday presented a mixed picture. Gasoline prices saw a significant jump of 3% in April, whereas grocery prices decreased for the second consecutive month. After nine months of decline, used car prices surged by 4.4%. Rental costs increased, but at a slower pace.

 However, there were indications in the data that inflation is continuing to moderate. Airline fares dropped by 2.6% in April, and hotel prices experienced a substantial decline of 3% after four consecutive monthly increases.

 Excluding the volatile costs of energy and food, core prices increased by 0.4% from March to April, matching the increase observed from February to March. This marked the fifth consecutive month of core price increases of at least 0.4%. Core prices are considered a more reliable measure of long-term inflation trends, and monthly increases at this pace significantly exceed the Federal Reserve's annual target of 2%.

 On a year-over-year basis, core inflation rose by 5.5%, just below the increase of 5.6% observed in March.

 The Federal Reserve is closely monitoring a measure of services inflation, which includes items such as dining out, hotel stays, and entertainment. This measure has remained persistently high throughout the past year. However, in April, it increased by only 0.1% compared to March and by 5.2% on a year-over-year basis. This is a slight decrease from the previous month when it exceeded 6%.

 Last week, the Federal Reserve indicated a possible pause in its rate increases after implementing 10 consecutive hikes. The purpose is to assess the impact of higher borrowing costs on the economy. However, the full economic consequences of these rate hikes may not become evident for several months.

 High inflation has been a significant burden for American consumers for over two years, posing a threat to the economy and presenting a challenging situation for the Federal Reserve. The central bank has increased its key interest rate by a substantial 5 percentage points since March 2022 in an attempt to bring inflation back down to the target rate of 2%.

 Furthermore, these higher rates have contributed to the collapse of three large banks in the past two months and are likely to result in reduced bank lending. As a consequence, the economy may weaken further.

In addition, there is a looming concern that the government's debt ceiling may be breached by early June. Republicans in Congress are refusing to raise the cap unless there are significant spending cuts agreed upon by President Joe Biden and congressional Democrats. Failing to raise the debt ceiling in time could lead to a default on the nation's debt, potentially sparking a global economic crisis.

During their recent meeting, the Federal Reserve's policymakers decided to raise their benchmark rate by a quarter-point, bringing it to approximately 5.1%. This is the highest level in 16 years. The rate hikes implemented by the Fed, aimed at curbing spending, growth, and inflation, have resulted in higher costs for mortgages, auto loans, credit cards, and business borrowing.

While the rate hikes may have the desired effect long-term on, many economists believe that this will weaken the economy to a recession sometime this year.

Miller Team | Castillo Real Estate
Paula Miller
6518 Sherry Lane
St. Augustine, FL 32095

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