Michmutters

And even as Americans face pressure from elevated grocery bills and rising rents, consumer spending is slowing but still strong — fueling hopes that inflation might ease without leading to a full-blown recession.

“We are turning the corner on inflation,” Moody’s Analytics Chief Economist Mark Zandi said in an interview before the data release.

The new report is a welcome development for a White House that has been celebrating recent legislative victories — including a law aimed at boosting domestic semiconductor manufacturing and the Senate’s passage of a deficit-reducing package with funding for climate and health initiatives — that Democrats say will fight inflation. It could also blunt Republican attacks that the administration — and the Fed — vastly miscalculated the rise in the cost of living.

New survey data published by the New York Fed on Monday found that consumers are softening expectations that runaway prices will continue to eviscerate their paychecks over the next three years. Those expectations play a key role in the central bank’s decisions on how much to raise rates. Americans now expect gas prices to rise 1.5 percent — compared to 5.7 percent just a month ago, and 6.7 percent for food, a decline of 2.5 percentage points.

While those figures represent clear improvements, it will take a lot more for President Joe Biden and the Democrats to turn around the narrative that spiking prices have overshadowed most of the economy’s gains as it emerges from the pandemic.

“Even if it comes down a little bit, it’s still going to be bad,” Sen. Rick Scott of Florida, who is heading the effort to flip the Senate to Republican control, said in an interview ahead of the release. He called for reductions in government spending, arguing that the Senate-passed package won’t cut it.

“When they raise taxes, they never get the tax revenue than they anticipate and they always spend more than they anticipate,” he said.

For now, Americans haven’t curtailed spending, even as prices continue to climb. While consumer confidence metrics are fading, MasterCard reported that year-over-year spending swelled by more than 11 percent last month — a trend the credit card company claimed was driven as much by demand as swelling prices.

Amazon likely had a hand as well.

In reports released this week, both BofA Institute and Adobe pointed to Prime Day — the e-commerce giant’s massive company-wide sale — as a contributing factor to July spending. The discounts offered on Amazon during the sale can “really influence where we understand the consumer to be; in a very sort of price-sensitive state,” said Adobe Digital Insights Lead Analyst Vivek Pandya.

Lower online prices, however, provide a respite for consumers hammered by soaring costs.

To be certain, economists in the past have been premature in declaring that inflation has “peaked,” and several other indicators, including an explosive jobs market, rising labor costs and spiking household rents suggest upward pressure on prices could last for some time. That means that even if the Fed avoids causing a deep recession, it may still have to keep rates high for longer than many investors expect.

“We have a lot more heavy lifting in front of us, despite the likely peak in inflation,” said Joseph Brusuelas, chief economist for RSM US. “We’re not in a multi-month process. We’re in a multi-year process.”

Meanwhile, several data points offer a muddled picture, at best, of where the economy is headed. The Consumer Price Index’s “headline number” includes food and energy — commodities with prices that are much more volatile driven by trading on exchanges, rather than by businesses. But the Fed also looks at measures excluding those prices to better gauge what it calls core inflation.

Any measure of price arises points to high inflation, so Fed Chair Jerome Powell says that distinction is less important for the moment. In July, core inflation rose 0.3 percent — still notable but below what economists had expected.

Still, Powell has said the central bank is looking for multiple reports showing inflation clearly cooling before it begins to ease off its interest rate hikes.

One of the most troublesome inflation drivers has been rent, which rose by 0.6 percent in July alone. Many expect housing costs to continue climbing sharply even as higher mortgage rates slow the ascent of home prices.

Andrew Patterson, senior international economist at Vanguard, said he expects inflation to persist above 3 percent through the end of 2023 because of housing costs — well above the Fed’s 2 percent target.

“If you get into the second half of next year and rents are persistently high? That’s going to be a point of concern for them,” he said.

Zandi, whose work has frequently been cited by the White House, said he expects rental prices to keep the Fed from hitting its target before 2024.

Strong labor markets will also play a role. The unemployment rate is at 3.5 percent, and while job openings have ticked down, they were still higher last month than at any point in the decade prior to the Covid-19 pandemic, according to Labor Department data. And pay raises have continued to accelerate, which could increase costs for employers even as worker income fails to keep pace with overall price increases.

Bank of America Institute economist Anna Zhou said the strong labor market has helped prop up bank balances across all income levels, which allows households to offset some of the pressure of rising prices — particularly when it comes to rent.

“Around 34 percent of US households are renters,” Zhou said. “Surging rent prices definitely are squeezing their wallets.”

That squeeze will feel even tighter if gas prices start to climb again and food inflation persists.

Administration officials are quick to cite any data point that reinforces their case that lowering inflation has been Biden’s “number one priority,” as one White House official said Tuesday. Lower gas prices, the Inflation Reduction Act — which isn’t likely to have any immediate impact on prices — and the new CHIPS and Sciences law are part of those messaging efforts.

None of that will be enough to assume inflation hawks, including former Treasury Secretary Larry Summers, who have warned that the Fed’s slow footing on inflation prior to the recent rate hikes has left the economy ill-suited to prepare for a soft landing.

“There will be disinflation coming from gasoline and other commodity prices,” Summers tweeted late Monday night. “It does not mean inflation is coming under control.”