Despite Some Signs of Relief, Economists Are Cautious on Inflation Outlook

People shop for produce at the Granville Island Market in Vancouver on July 20, 2022. The Canadian Press/Darryl Dyck

Inflation is retreating from record highs, although too slowly, said several economists who spoke with The Epoch Times about the outlook for the economy and inflation over the next six months.

But the downward pressure on future price increases isn’t necessarily giving price relief to consumers right now, they said.

And at least one expert thinks the downward trend of inflation is not permanent.

The experts agreed that, in some respects, it’s the worst of all possible scenarios, with inflation pressure, instead of being a gauge of a booming economy, actually depressing the economy.

Consumer Sentiment Is Down

The consumer credit company, WalletHub, released a report on Aug. 17 that said consumer confidence, as measured by their index, is down 7 percent this month versus last year, even as inflation is in general retreat.

The WalletHub survey measures economic confidence in consumers using ten different measures.

Two indirect measures WalletHub uses that show inflation pressure—positive sentiment about overall finances and the certainty of having a job—registered rather large losses in confidence at -6.3 percent and -5.2 percent, respectively.

According to one expert, both of those numbers would seem to indicate an easing of inflation, but maybe not at a rate that’s satisfactory to consumers.

“In July this year, the inflation rate was 3.2%, which is still higher than the Federal Reserve’s (Fed) target of 2%,” WalletHub analyst Jill Gonzalez told The Epoch Times.

“Inflation is certainly going down, albeit slowly, due to the recent Fed rate hikes. It’s safe to say that decreasing inflation won’t be noticeable to the consumer right away, with prices for various goods still increasing despite the Fed’s attempts,” Ms. Gonzalez added.

Prices and Interest Rates Remain High

That’s in part because while inflation may be moderating, prices still remain high, with consumers facing the aftereffects of inflation sticker shock, according to a recent CBS News/YouGov poll of 2,181 U.S. adults conducted July 26-28.

Sixty-nine percent of respondents said that prices have been rising over the past few weeks.

Ms. Gonzalez said the period between the end of the COVID-19 pandemic—and the supply chain disruptions caused by it—and the start of Russia’s war in Ukraine was too short for the economy to stabilize.

The result has been the “record-high inflation rate we’ve experienced in the past couple of years.”

Along with the pain that people feel in their wallets from rising prices comes the pain that people feel from paying higher interest rates, which one economist likened to a “hangover.”

“I share the Austrian view that a hangover is inevitable once the Fed makes the mistake of inflating,” libertarian economist Dan Mitchell, co-founder of the Center for Freedom and Prosperity, told The Epoch Times.

Record Inflation Is Hard to Tame

Inflating is a term used by economists to describe when the Federal Reserve makes money available to the economy either through lower interest rates or quantitative easing by buying securities in the open market, especially bonds.

Mr. Mitchell explained that when the Fed creates too much money for the economy, it inevitably leads to higher prices, which then inevitably leads to pain when the Fed is forced to slam on the brakes with higher interest rates.

The pain from rising interest rates, which is the only tool the Fed has to bring down inflation, could continue for some time.

“[R]ecord-high inflation is hard to bring down, WalletHub’s Ms. Gonzalez said.

“The Fed rate hikes will continue, but the significant impact it has on most loans is quite damaging to consumers. For example, consumers are expected to pay around $36 billion in extra interest charges over the next 12 months,” she added.

There is general unanimity amongst economists that the Fed’s Open Market Committee, which sets interest rate policy, is not done raising interest rates yet.

While 3.2 percent inflation may seem low, a look at a chart from the Bureau of Labor Statistics shows graphically how anomalously high this period of inflation is compared to other times, said one expert.

“The short and easy answer is that the Fed has not tamed inflation yet,” EJ Antoni, an economist with the Heritage Foundation, a conservative think tank, who specializes in fiscal and monetary policy, told The Epoch Times.

Mr. Antoni said that one only needed to look at a chart of inflation to realize that inflation is not moderating as much as advertised.

The pandemic produced a record amount of quantitative easing by the Fed, which in turn has produced high inflation, said Mr. Antoni.

“[The Fed] is trying to square the circle by creating money for the government to spend, without allowing that money to get out into the economy where it will cause inflation,” he added.

It’s an impossible task, he said.

“I’m not quite sure how the Fed thinks they will get out of this,” said Mr. Antoni.

Antoni said the idea that inflation is trending towards the Fed’s goal of 2 percent “is a complete lie.”

Economists Are Divided and Consumers Worried

In July, inflation ticked up a little from 3 percent to 3.2 percent, and Antoni expects that August is shaping up to show an additional acceleration of inflation.

In fact, two inflation-related components have seen substantial increases so far in the third quarter, according to the Atlanta Federal Reserve’s real-time forecast of GDP.

“After this morning’s housing starts report from the US Census Bureau and industrial production report from the Federal Reserve Board of Governors, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 4.4 percent and 8.8 percent, respectively, to 4.8 percent and 11.4 percent,” said the Atlanta Fed.

The strong increase in personal consumption numbers and domestic investment led the Atlanta Fed to increase its third-quarter forecast for GDP growth to 5.8 percent.

That seems to indicate accelerating inflation. Or maybe not.

“The relationship between GDP growth and inflation is not always straightforward,” Ms. Gonzalez said.

“A GDP growth rate of 5 percent for a single quarter is quite high, but it won’t have a direct and immediate impact on inflation,” she added.

Mr. Mitchel said that he thinks inflation will continue downward as the Fed sells off some of the bonds they bought when engaged in quantitative easing.

“The Fed’s balance sheet is shrinking, so I assume inflation will continue to fall,” he said.

While there’s no consensus amongst economists about where inflation is actually headed, they all agree that it’s not good for the consumer.

“The current economic conditions are unfortunately making consumers considerably less confident about their financial outlook,” Ms. Gonzalez said.

“From increase in stress, to a weaker sense of job security and less interest in large purchases, it’s clear that consumers are slowly getting overwhelmed by the recent banking crisis,” she concluded.