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Prices Are Chilling A Bit


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What's going on?

Prices in the US did not rise as much as expected in April, adding to a trend of cooling inflation (tweet this). Higher rates of inflation can be symptomatic of a strengthening economy as people have more money to spend on goods and services, thereby driving prices up. However, it seems that for now inflation has peaked.

What does this mean?

After a stretch of accelerating inflation, partly caused by a steep recovery in commodity prices in early 2016, this year has seen some comparatively meek price rises. Remember, inflation is a measure of prices today versus 12 months ago, and the effects of last year’s commodity price surges are disappearing from the yearly metric as the months go by. This may explain why prices have risen at a slower pace in April compared to earlier this year.

Nonetheless, inflation is still hovering around the US Federal Reserve’s (“the Fed”) 2% target, which is not too shabby.

Why should I care?

The bigger picture: Softer inflation does not seem too worrying for now.

Inflation is one of the key metrics monitored by the Fed in making its decision on whether the economy is strong enough to withstand higher interest rates. For instance, prices rise as the economy strengthens because individuals and businesses are making more money, which leads to even higher levels of spending and demand. As such, lower inflation can be a cause for concern; however, in this case, markets aren’t too worried, particularly given unemployment (another crucial metric) is at its lowest level in a decade! As a result, chances of an interest rate rise in June are still pretty high.

For you personally: Your real income is barely increasing.

Prices may be rising less quickly, but that’s only exciting if the growth in your salary is whizzing ahead (this would make you, effectively, richer!). Unfortunately, this is not the case and instead wages, when taking inflation into account, are growing at a much slower pace than in previous years (this is true in both the US and the UK).

Originally posted as part of the Finimize daily email.

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