Inflation Concerns Intensify as Prices Rise
The US economy is bracing for a potential inflation surge, driven by increases in gas, egg, and used car prices. According to economists, the consumer price index is expected to rise 2.8% from last year, marking the third consecutive monthly increase.
Fueling Inflation Fears
The uptick in prices has sparked concerns among economists and financial markets that inflation may become stuck above the Federal Reserve’s 2% target. This has led to higher interest rates on Treasury securities, resulting in increased borrowing costs for mortgages, cars, and credit cards.
Core Inflation Remains Steady
Excluding volatile food and energy categories, core inflation is forecast to remain at 3.3% for the fourth month in a row. On a monthly basis, prices are likely to rise 0.3% in December, exceeding the Fed’s 2% target.
One-Time Factors Contribute to Price Increases
Some of the price increases can be attributed to one-time factors, such as the outbreak of avian flu, which has reduced egg supply and driven up costs. However, economists expect inflation to decline in the coming months as apartment rental prices, wages, and car insurance costs grow more slowly.
Uncertainty Surrounds Trump’s Policies
President-elect Donald Trump’s proposed policies, including boosting tariffs on all imports and implementing mass deportations, have clouded the inflation outlook. While Trump has suggested using tariffs as bargaining chips, economists at the Federal Reserve expect inflation to remain steady this year, pushed up by higher tariffs.
Fed’s Stance on Interest Rates
Fed Chair Jerome Powell has stated that the central bank will keep its key interest rate elevated until inflation returns to 2%. As a result, Wall Street investors expect the Fed to cut its key rate only once this year, from its current level of 4.3%.
Borrowing Costs Remain High
Mortgage rates, influenced by the yield on the 10-year Treasury note, have risen for the fourth straight time to 6.9%, far above pandemic-era lows. Other borrowing costs remain high due to expectations of higher inflation and few Fed rate cuts.
Job Market Resilience Fuels Growth
The resilient job market, with an unemployment rate of 4.1%, has enabled consumers to continue spending and driving growth. However, if demand exceeds production capacity, it could fuel further inflation.
Economists Weigh in on Tariffs’ Impact
Several prominent economists, including former Federal Reserve Chair Ben Bernanke, believe that Trump’s tariffs will have only minor effects on inflation. Jason Furman, a top economic adviser during the Obama administration, estimates that the duties may lift the annual inflation rate by just several tenths of a percentage point, but notes that even a small increase could influence the Fed’s rate decisions.
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