Inflation is slowing, but still high. Here’s what you need to know.

NEW YORK (AP) After hitting 40-year highs in the summer, US price increases are now steadily easing.

Consumer inflation slowed to 7.1% in November from a year earlier and to 0.1% from October, the government said on Tuesday. Excluding volatile food and energy prices, so-called core inflation rose by 6% over the past 12 months and by 0.2% from October.

Although inflation is slowing, prices remain high, especially for food and many services.

Here’s what you need to know:

WHAT’S WITH INFLATION?

In recent months there has been a shift in inflation from goods to services.

In general, this means that prices for goods and gas are rising more slowly than prices for things like dining out, travel, health care, financial services and hospitality. Prices for used cars, furniture and appliances are moderate.

Food prices are an exception, driven by more expensive eggs, vegetables and chicken.

Kathy Bostjancic, chief economist at Nationwide, noted that core commodity prices have slowed dramatically if you exclude food and energy. But prices of services, excluding energy, have remained near their 40-year high.

WHAT CONTRIBUTES TO INFLATION SLOWERING?

Average gas prices are down from $5 a gallon in June to just $3.26 a gallon, according to AAA, below the year-ago average.

The grunt of the supply chain is also coming to an end. Ports have cleared ship backlogs. And the cost of shipping a freight container from Asia has returned to pre-pandemic prices.

The Federal Reserve’s series of aggressive rate hikes has also put downward pressure on prices by making borrowing increasingly expensive.

WHY ARE SERVICE PRICES RISING MORE THAN GOOD PRICES?

Part of it is the ongoing shift from the pandemic era, when millions of Americans stayed away from restaurants, postponed vacations, and stopped going to concerts or movie theaters. As COVID-19 fades, people are making up for lost time by traveling and eating out again.

At the same time, spending on goods such as exercise bikes, furniture and cars peaked during the pandemic, but is now declining.

Some economists point to rising wages as a primary driver of rising service costs, as employers pass on higher labor costs to consumers.

Others say companies have seen in recent months that consumers are willing to absorb ever-increasing prices. With costs for things like shipping falling, companies haven’t always passed those savings on to consumers.

If companies don’t feel the pressure and need to discount, they won’t, Bostjancic said. They’ve gained some pricing power, and it’s been good for the bottom line. They’ve benefited quite a bit and they want to keep that pricing power as long as possible. As long as the consumer resists those prices, they won’t change.

WHAT DOES ALL THIS MEAN FOR INTEREST RATES?

In some ways, the Fed is better suited to fight commodity inflation than services inflation. When people buy expensive things, such as appliances, cars or furniture, they often borrow money for it. High interest rates increase the cost of borrowing, delaying those purchases. The Fed has a less clear path to influence the price of services.

Track trends that affect the local economy

Subscribe to our free Business by the Bay newsletter

Every Wednesday, we break down the latest business and consumer news and insights you need to know.

So while inflation in the goods sector is slowing, inflation in the services sector could prove more persistent. As people spend their savings accumulated during the pandemic, demand may decline. But until those savings are meaningfully depleted, or debts reach an unmanageable level, spending can continue.

That said, the Fed’s short-term interest rate affects loan rates across the economy. The central bank has already weakened the housing market considerably with its tightening monetary policy.

Chairman Jerome Powell has made it clear that the Fed will raise its key rate by a smaller step on Wednesday. Investors are anticipating a half-point rate hike by the Fed after four consecutive three-quarters-point hikes.

WHERE DOES INFLATION COME FROM HERE?

Powell has suggested housing costs, which have been a major driver of inflation, should begin to slow next year, including rent.

And Gregory Daco, chief economist at EY-Parthenon, suggested that momentum behind inflation will continue to wane in 2023.

We expect continued downward pressure in goods and energy prices over the next 12 months, Daco said. On the services side, we expect pressure to ease somewhat, with less demand for travel and leisure over time.

Daco predicted that there will also be downward pressure on housing costs.

SO HOW LOW CAN INFLATION GO?

The Fed aims to keep inflation on average around 2 percent on an annual basis. Before the pandemic hit, inflation was so persistently low that the central bank struggled to raise it even to 2%. (Inflation that is too low can slow economic growth by causing people to postpone purchases if they think they can buy a product at a lower price later.)

Some economists are now suggesting that the Fed won’t be able to push inflation back to 2% anytime soon and may instead conclude that a slightly higher inflation target is more realistic.

IF INFLATION SLOWS, WHY DOES THIS STILL FEEL PAINFUL?

Wages have not kept up with prices, and lower-income households, which spend disproportionately more on housing, fuel and food, have been hardest hit.

We were not even in the face of inflation, Daco said. In any case, inflation increases inequality.

These factors can lead to a K-shaped recovery, with the performance of different parts of the economy diverging like the arms of the letter K. In this scenario, some parts of the economy may experience strong growth while others continue to contract.

There is a wealth effect, Nationwides Bostjancic said. Higher- and middle-income households have more savings related to the pandemic. They always have more buffer to absorb setbacks than other income groups.

Low- and middle-income households may have already depleted their reserves, Bostjancic noted, and now lack the savings to handle both higher prices and higher borrowing rates.

While they have seen wage increases, it has lagged inflation, she said. So we’ve seen more people turn to credit. We don’t see outright delinquencies, but people are falling behind on payments, suggesting that consumers are under pressure.

IS THERE STILL RISK OF A RECESSION?

Daco indicated that no major recession is imminent.

We have seen resilience on the part of both US consumer and business leaders, he said. Companies have not continued with broad layoffs. Right now we are not in a recession, but seeing more hesitation and discretion when it comes to hiring and buying decisions.

By CORA LEWIS, Associated Press

___

The Tampa Bay Times has a team of reporters focused on rising costs in our area. If you have an idea, question or story to tell, please email us [email protected].

. . .

related stories

NEED HOUSEHOLD HELP? Here are housing resources in Tampa Bay.

WATCH OUT FOR SCAMS: Here’s how to check rental listings.

UPDATED: Sign up for our free weekly Business by the Bay newsletter, with insights on the economy, real estate and local businesses.

TAMPA BAY HOUSING TREE: 10 voices from the frontline.

THREAT TO HELPERS: Sharp rent increases are also hurting people who help Tampa Bay’s homeless.