Inflation Takes a Breather: Now Just a Mildly Annoying Background Noise While We Step on the Gas Pedal of Economic Chaos!

Just because the Federal Reserve is watching its inflation target like a hawk doesn’t mean the financial circus is wrapping up. Nope, inflation, that sneaky little gremlin of the economy, still lurks in the shadows, playing hide and seek with prices while everyone else struggles to find a decent place to catch a break.

Recent price reports are like that friend who shows up to a party later and claims they’re “fashionably late”—they’re a bit stronger than expected but still too awkward to hit the dance floor. Goldman Sachs, ever the optimist, confidently predicts that when the Bureau of Economic Analysis releases the Fed’s favorite price measure, inflation could just close enough to the 2% target to justify bringing out the confetti. Spoiler alert: it won’t be that impressive.

Inflation isn’t just a number; it’s an artistic installation, a mosaic of financial chaos that eludes any attempt at summary—sort of like trying to squeeze your way through a crowded bar without spilling your drink. Even if the headline federal inflation numbers are glancing around 2%, plenty of folks—including some Fed officials—feel like they just won the consolation prize in a bad game show.

Fed President Mary Daly, channeling a mix of optimism and apprehension, proclaimed to an audience at NYU that while inflation might be easing, the Fed “is not declaring victory nor is it eager to rest on its laurels.” So, it looks like the Fed’s laurels are a little weathered and in need of a good dusting. It’s a long road ahead!

Daly shared a recent encounter that had all the drama of a true economic thriller, as a young man with a stroller—and perhaps some misplaced hopes—shouted, “President Daly, are you declaring victory?” As she assured him no victory banners were being unfurled, we couldn’t help but think that the Fed’s banner collection must be gathering dust right next to the office snacks.

The real conundrum for the Fed? If inflation is on the run like a cat during a thunderstorm, why are interest rates still doing their best impression of a stubborn houseguest refusing to leave? Conversely, if inflation is still throwing a rager, why is the Fed cutting rates like a pair of overly generous coupon-clippers?

Daly sees the September rate cut as an attempt to “right-size” policy—basically the economic version of going to the tailor when your pants are a little too tight after a pizza binge. But convincing the skeptical public that inflation is easing is like trying to convince toddlers that broccoli is a tasty treat.

Remember, there are two sides to the inflation coin: the shiny headline rates and the grim reality of the cumulative economic hangover that three-plus years of inflation has left in its wake. Checking the month-to-month rate is only part of the wild ride.

Meanwhile, monthly rates have shown a significant getaway, with the CPI inflation clocking in at 2.4%, a moment of peace after the chaos of a 9.1% peak in June 2022. But the CPI is just like the party guest who won’t stop talking—that’s not the number the Fed is listening to. They’re more keen on the personal consumption expenditures price index, a less flashy metric you can’t show off at the bar but can probably explain with great enthusiasm if everyone else is confused. So as Goldman estimates, the PCE might finally round down to the sacred land of 2%—right before it throws a wrench into the works again.

If we cast our minds back to the hit show “Inflation: The Never-Ending Series,” inflation passed the Fed’s 2% objective in March 2021 and was initially shrugged off as a fleeting reaction to the pandemic—a bit of “it’s just a phase.” You know how that goes. Fed Chair Jerome Powell even had a laugh about “the good ship Transitory,” proving he has a great sense of humor—fitting for the captain of this sinking ship.

Clearly, aside from the Fed’s sense of humor, inflation wasn’t just passing through, with the all-items CPI soaring a staggering 18.8% or so since then. Food inflation? Oh, you fancy! That’s up 22%. And the price of eggs? Buckle up—it’s a whopping 87% increase! Honestly, your breakfast may soon require a loan app. Not to mention auto insurance, which is now flirting dangerously close to an almost 47% increase, and gasoline is still riding high, up 16% despite its recent slide. Oh, and housing—let’s just say it’s not on speaking terms with “affordable” anymore, with median home prices climbing 16% since Q1 2021 and a jaw-dropping 30% since the pandemic started its infamous buying spree.

Even as some inflation measures finally start easing, others are giving stubborn stink eyes and refusing to budge. Take the Atlanta Fed’s 4% sticky price measure—that includes rent, insurance, and medical care, which your wallet has felt all too keenly. Meanwhile, the delightful “flexible CPI,” which includes food, energy, and vehicle costs, is throwing a party in outright deflation at -2.1%. So, prices that don’t change often are soaring while those that do are throwing a little temper tantrum. Welcome to economics!

And let’s not overlook another fun aspect: “Core” inflation, which is like the grown-up version of inflation that excludes food and energy, is still strutting around at 3.3%. The Fed’s historical take on Core tends to hinge on it being the wiser guide to long-term trends, making this data a bit of a headache for policymakers.

Before our inflation rollercoaster started climbing to absurd heights in 2021, American consumers used to be as chill about money as a cat lounging in a sunbeam. Now, however, despite their constant grumbling about living costs, they’ve adopted a spendthrift lifestyle worthy of a reality show. One can only wonder if they think their credit cards can swim.

In an exhilarating plot twist, consumer spending soared to about $20 trillion in the second quarter, and in September, sales grew more than anticipated, like a plant after a rain: a surprising 0.4% increase. But wait—year-over-year spending only crept up by 1.7%, lagging behind the 2.4% CPI inflation rate like a kid unwilling to do their homework.

The financial conundrum is that with rising prices, Americans have turned into overzealous borrows high on IOUs of all shapes and sizes.

Household debt spiraled to $20.2 trillion by the second quarter—an increase of $3.25 trillion, or 19%, since inflation kicked off its rebellious summer tour. Guess what? Household debt jumped 3.2% in just one quarter—the largest leap since Q3 of 2022. It’s like a game of “who can rack up more debt?” and nobody’s claiming to be the champion.

So far, the debt circus hasn’t turned tragic, but it’s getting there, folks. The current debt delinquency rate has hit 2.74%, the highest it’s been in almost 12 years, though still hanging slightly below the long-term average of around 3%. Meanwhile, a new New York Fed survey has folks feeling a bit queasy, with the chance of skipping a minimum payment reaching 14.2%—the highest since the pandemic’s prime time!

And do we hear a sob story from small businesses too? Why, yes! It seems credit card usage is on the rise among small businesses, climbing over 20% compared to pre-pandemic levels. The pain is palpable, and it’s not exactly a case of sweet relief from the Fed’s interest cuts if inflation continues playing hard to get.

In fact, small businesses are feeling the pinch—they report inflation as their main party crasher yet again in a recent survey from the National Federation of Independent Business, with 23% noting it as their number one issue. Time to break out the party hats, everyone!

And just when you thought things couldn’t get more bizarre, the Fed faces a critical conundrum coming up in their Nov. 6-7 policy meeting. After policymakers trimmed interest rates by half a percentage point in September, the markets pulled a fast one and indicated a higher trajectory instead. Talk about plot twists!

Since the cut, the rate on a 30-year fixed mortgage shot up about 40 basis points. It’s like an economic game of musical chairs, where everyone suddenly wants to stand up just as the music stops. Even the 10-year Treasury yield has joined in on the fun, rising similarly, and the 5-year breakeven rate is creeping up to its highest level since early July—up by a quarter point, no less!

One voice of reason, SMBC Nikko Securities, is suggesting that maybe, just maybe, the Fed should hit pause on the interest cuts until they grasp the bigger picture. They argue that the stock market has gone bonkers, rising to dizzying heights as the Fed cuts have led to more ease, which might threaten to inflate inflation all over again. Atlanta Fed President Raphael Bostic, bless his soul, might be considering a November pause, but the puzzle gets stickier.

A young family guy, echoing the concerns of many, lingers in Daly’s memory—his fears about the Fed possibly dancing with disaster in their policy decisions resonate. Daly’s response? A quaint little notion of “victory” where people will have the time to “catch up and then get ahead.” Cheers to miracles, right?