Is inflation in the U.S. ready to blow its top? Uh, no. Prices are rising, but just gradually.
It’s all over but the shouting. Interest rates are going up. And up. And up.
That’s what a roaring economy will do. Households and companies are the most confident in years. Consumer spending and business investment are strong. And years of steady hiring have knocked the unemployment rate down to the lowest level since 1969 — an astounding 3.7%.
The reward? Higher costs of borrowing for consumers and businesses.
The economy is doing so well the Federal Reserve has embarked on a path to lift a key short-term U.S. interest rate to at least 3%, pushing them to the highest rate in more than a decade. That will raise the cost of all sorts of other loans.
Oh sure, interest rates are still low, but if you don’t act soon, that home mortgage, auto loan or small-business line of credit is going to cost more. The Fed is on track to raise interest rates again by December.
It’s not just the strong economy that’s pushing the Fed to act, though. What’s accompanied fast economic growth is higher inflation, the archenemy of central banks every where.
The latest readings on inflation this week aren’t going to set off any alarms, but they’ll likely affirm that the trend is still up.
Most notably the consumer price index, or cost of living, is forecast to rise 0.2% in September. This index tracks all the things Americans spend money on each month: Rent, food, gas, medical care, clothing, transportation and the like. The report will be issued Thursday.
An increase of that size should keep the yearly rate of inflation at around the current level of 2.7%. That’s above the Fed’s preferred 2% range, but well below what’s considered threatening to the economy.
Consumer inflation is somewhat lower if the volatile categories of food and energy are stripped out — 2.2% over the past 12 months.
What’s less clear is where inflation goes from here.
Some economists insist it will keep rising and breach the 3% mark soon for the first time since 2011, forcing the Fed to raise interest rates even more swiftly and threatening the expansion.
Others suggest prices could level off between 2% and 3% barring another major oil shock or another unusual trigger. Hence economic nirvana: steady growth and stable inflation — the dream of central banks everywhere.
For now the Fed can bide it’s time. Inflation has leveled off over the past few months to give it some more breathing room.
“There is nothing in the inflation data that would make the [Fed] feel compelled to pick up the pace” of rate hikes,” said chief economist Richard Moody of Regions Financial.