Claims of Inflation Victory Questioned Amidst High Prices
Despite claims from the president that inflation has been conquered, recent data suggests a different story. In the last four months, inflation has increased three times and is slightly above what it registered a year ago. The president stated at a global meeting that grocery and mortgage rates have fallen, indicating that the battle against inflation has been won.
At a notable address held just before interest rates were cut for the first time this year, a key financial authority stated that inflation, though still a bit high, has significantly dropped from its post-outbreak highs. He also mentioned that the risks associated with inflation have lessened.
The Risks of Ignoring Persistent Inflation
However, ignoring or minimizing inflation when it's still above the 2% target set by monetary authorities could pose serious risks. This could backfire politically, as many citizens continue to feel the pressure of high prices on their budgets.
The gamble is even bigger for those who control interest rates. They have reduced the key interest rates, assuming that the imposed tariffs will only cause a temporary surge in inflation. If this assumption proves incorrect, if inflation worsens or stays high longer than anticipated, their credibility in combating inflation might suffer.
The Importance of Credibility
Credibility is vital in maintaining price stability. If people trust that the central bank can keep inflation under control, they won’t push for significantly higher salaries when prices increase, which can trigger a cycle of inflation. Businesses often raise prices to compensate for increased labor costs.
However, with recent memory of pandemic-induced inflation and tariffs driving up the cost of imported goods, consumers and businesses might start doubting that inflation will remain low. If this turns out to be true, the recent rate cuts could be seen as a mistake.
Consumer Prices on the Rise
Despite tariffs not causing as much inflation as predicted, consumer prices rose 2.9% in August from a year earlier, up from 2.6% at the same time last year and above the 2% target. There's also an anticipation of higher costs for many imported items like furniture, appliances, and toys.
Moreover, some everyday goods are still experiencing quicker price hikes than before the pandemic. Grocery prices, for instance, rose 2.7% in August compared to the previous year, marking the largest non-pandemic increase since 2015.
Tariffs Adding to Inflation Concerns
The president recently imposed new tariffs on various products, which could potentially cause inflation to rise. Some businesses are already raising prices to counteract the tariff costs, such as a prominent soup company implementing “surgical pricing initiatives” due to tariffs on steel and aluminum.
The largest artificial Christmas tree seller in the nation plans to increase prices by approximately 10% this holiday season to offset tariff costs. They also anticipate a reduced supply of artificial trees and decorations this year, which could further drive up prices.
Inflation Risks Recognized by Policymakers
Many policymakers are aware of these risks. A high-ranking official at the central bank stressed the importance of maintaining credibility on inflation, saying that inflation resulting from a loss in confidence in the central bank is more challenging to combat than price spikes caused by supply disruptions.
However, some officials suggest that other trends could balance the impact of tariffs. One official, appointed just before a significant meeting, said that a steady slowdown in rental costs and a sharp drop in immigration due to recent policies could reduce demand, thereby alleviating inflation pressures.