When will inflation end? Economists weigh in

The rate of inflation has shown signs of easing, following the highest spike in four decades.

Yet the shock of rising prices continues to have an impact on consumers’ psyches.

“The typical U.S. consumer is looking at the gas station or their grocery store and seeing prices elevated and not coming down anytime soon,” said Ataman Ozyildirim, senior director of economics at The Conference Board.

The nonprofit think tank’s consumer confidence index declined in May amid “gloomy” expectations.

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Consumers’ perception of current employment conditions deteriorated the most, The Conference Board found, with those who said jobs are “plentiful” dropping to 43.5% from 47.5% in April.

Meanwhile, expectations for inflation were stable, but still high, with inflation expected to average 6.1% over the next 12 months.

“When anecdotally we ask consumers what’s your top concern on the economy, prices and inflation still come out as the top concern,” Ozyildirim said.

A growing share of Americans — 61% — now say price increases have caused financial hardship for their households, according to Gallup, up 6 percentage points from November.

For many consumers, the big question is how soon they may see financial relief.

Consequently, borrowing costs are rising on auto loans, credit cards, mortgages and student debt. The caveat is that savers can now earn higher rates on their cash. 

The Fed’s process is like trying to slow the speed of a car, according to Laura Veldkamp, finance professor at Columbia Business School.

“What we’re doing right now is slowing the rate of inflation,” Veldkamp said.

That means still driving the car forward, but slowly, she said. It does not mean trying to throw the car in reverse, which would prompt negative inflation.

Negative inflation would be “pretty dangerous,” Veldkamp said, since it would remove price stability for what people can expect to pay in the future. This would make it more difficult to value forward-looking contracts such as rents or hiring, she noted.

It would also lead to a collapse of demand, since decreasing prices take away the incentive to buy something today when it will likely be cheaper tomorrow, she said.

Instead, the Federal Reserve is aiming to keep inflation off consumers’ radar screens.

“Their job is to keep prices so stable that you don’t worry exactly what a dollar will be worth a year from now,” Veldkamp said.

The annual inflation rate eased to 4.9% in April, per the consumer price index. The Fed’s preferred inflation measure — the personal consumption expenditures price index — was up 4.7% on an annual basis as of April.

“The increase in prices is not expected to come down to the Fed’s 2% target rate anytime soon,” Ozyildirim said.

Moreover, not every price will move in lockstep, as categories such as automobiles, homes and gasoline are subject to unique influences, such as supply chain bottlenecks, according to James Angel, associate professor at Georgetown University’s McDonough School of Business.

“It’s not like suddenly tomorrow all the prices are going to go back to where they were in 2020,” Angel said.

Inflation tends to create a “vicious circle” in the economy by prompting demand for higher wages, which then triggers higher manufacturing costs and therefore higher prices.

When high inflation does subside to normal levels, it will do so quietly, he said.

A 2% annual inflation rate will add up to more than 20% over a decade, Angel noted.

“But from day to day, you don’t really notice it,” he said.