Inflation: For the first time in two years, inflation in the United States has fallen below 5.00 percent

2023-05-10 19:26:35

• Natalie Sherman
• Economics Editor – New York

4 hours ago

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Low food and energy prices have been a major driver of declining US inflation

Prices of dairy, airline tickets and new cars all fell in the US last month, helping to push the country’s inflation rate to its lowest in two years.

Official data issued on Wednesday indicated that US annual inflation rose by 4.9 percent in April, compared to the reading recorded in the same month last year, which recorded an increase of 5.00 percent.

This data highlights the decline in US consumer price inflation for the tenth month in a row.

This slowdown in price inflation came following the Federal Reserve raised interest rates from near zero in March 2020 to 5.25 percent at the current May meeting, as part of efforts to control the sharp rise in prices.

Annual inflation in the United States rose to the highest levels in more than 40 years to 9.1 percent, indicating the highest levels since 1981.

But Fed officials are reluctant to declare their victory in the battle with inflation due to the spread of the problem of sharp rise in inflation – following it was limited to sectors such as energy and manufacturing products – in a large number of operating sectors in the US economy.

Housing, fuel and used car prices rose in the United States from March to April. Haircutting services, landscaping services, veterinary services, and other services also witnessed jumps in prices during the same measurement period.

Although inflation has ceased to show sharp rises, overall consumer prices continue to rise faster than the central bank’s official inflation target of 2.00 percent, the level the Fed believes will serve the US economy.

US consumer prices – with the exception of food and energy prices, which involve the largest amount of volatility among price components – fell to 5.5 percent in April, compared to the same month last year, which recorded 5.6 percent.

“With US inflation now falling below 5.00 per cent for the first time in two years, markets are beginning to realize that the light at the end of the tunnel is getting brighter and the worst is ahead,” said Richard Carter, head of fixed interest asset research at Quilter Cheviot. The crisis of hyperinflation is over.

He added, “This indicates that inflation is still above the level set by the official target of the Central Bank, while inflation, excluding food and energy prices, continues to show further rise.”

The Fed has raised rates ten times since March 2022, bringing the interest rate to the highest levels since 2007.

Such moves in US inflation would discourage people from borrowing, thus slowing down economic activity and facilitating the task of the central bank in reducing inflationary pressures that continue to increase.

Jerome Powell, Chairman of the Federal Reserve Board of Governors, indicated earlier this month that Fed officials believe that they have done enough to restore control of inflation, and that they are ready for now to stop raising rates.

Economists at Wells Fargo said the latest figures might help persuade policymakers to stop raising rates, but cautioned that “progress remains incremental rather than rapid”.

“Slowing food inflation and falling energy prices provide a respite for consumers following they have endured the most painful times of sharp price hikes we have seen over the past two years,” they wrote.

The report continued: “Even if there are indications that inflation trends in general are moving in the right direction, we believe that it will take much more noticeable progress than has been achieved before policy makers are ready to announce that the mission is accomplished.”

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