When it comes to inflation, this is an election year. And with inflation now standing at 3.4 percent year-over-year, it’s been a long time since Americans have seen such a hot number.
Still, some economists and policymakers think that some relief may be on the way. Some signs suggest that oil prices could decline, and that it’s worth being more patient with workers’ wages.
Here’s what’s driving inflation now and what policymakers think is holding it back:
Higher prices for energy and food. These trends are deeply embedded in the recent data. More than half of the overall inflation rate is driven by spikes in food and energy prices. Because energy prices tend to move in lockstep with the price of oil, oil prices have long been one of the most important measures for investors and central bankers.
The cost of a barrel of crude is up 59 percent over the last year, and gas prices have increased 24 percent during that time. Those trends are being driven by increased demand for oil and gas in emerging economies and producers like Saudi Arabia and Canada, while supply remains constrained as production output remains below levels needed to push prices up further.
And food prices have climbed, as well. Grain prices have increased 12 percent over the last year, while vegetable prices have soared 32 percent. Food inflation has historically moved in line with oil prices, but it’s worth remembering that the pace of inflation is somewhat different than the spike-and-spike model. It doesn’t mirror the same supply-and-demand picture.
Because we’re already more than a year into this oil price surge, it’s possible that the boost is starting to wane. And for 2017 at least, that could be a healthy thing. It could be one of those years for low-to-no inflation, when central banks’ effectiveness is measured by their ability to maintain price stability.
If oil prices slip, wages may also climb, as prices of produce, meat and other products fall. Wage growth is often linked to higher oil prices because those prices affect transportation costs and agricultural production costs. Higher energy prices translate into higher costs for farmers, allowing for, for example, higher pay for meat cutters.
And, inflation worries persist for low-to-moderate-income workers, who are typically vulnerable to increases in prices. According to the Committee for a Responsible Federal Budget, labor economists from the centrist Brookings Institution have found that, from 1997 through 2016, the share of higher-wage workers fell from 49 percent to 42 percent, while the share of lower-wage workers declined from 47 percent to 39 percent. That’s because, over that time, the share of lower-wage workers fell even as wages stagnated for middle-wage workers.
What’s a good time to fight inflation?
There are a lot of answers to that question, and the good news for Federal Reserve Chair Janet Yellen is that there could be a solution. According to the Beige Book, the Fed’s anecdotal survey of its regional Federal Reserve banks, the usual worries about the U.S. economy — declines in equipment and new investment, and a slowdown in housing — didn’t materialize at all this past quarter.
Economists and investors have also pointed to declining inflation expectations as evidence that rates may remain stable. A survey of traders from the Chicago Mercantile Exchange found that a lower-than-usual share of futures traders expected inflation to fall.
While Yellen’s tenure may be getting close to the end, she’s not the only person who thinks that easing monetary policy could help. Ben Bernanke, who ran the Fed under both George W. Bush and Barack Obama, also suggested that the appropriate course is to raise rates a bit more slowly and cool inflation a bit more.
Yellen said in October that the Fed’s normalization plan still includes two interest rate hikes by next year.
While a handful of Fed officials, including New York Fed President William Dudley, have suggested interest rates could slow somewhat, other officials such as St. Louis Fed President James Bullard suggested that the Fed would need to raise rates a bit more aggressively.
And of course, the job market continues to improve. In October, the unemployment rate fell to 4.1 percent. At the same time, there’s still concern about a labor market that’s far from healthy. An increasing proportion of Americans are unemployed and discouraged from looking for work. And there are still millions of Americans who can’t find jobs.
If America’s economy continues to heal as predicted by economists, over time the