Americans get relief from rising food and gas prices, but core inflation remains high

Amna Nawaz:

Good evening, and welcome to the "NewsHour."

Inflation cooled last month to its lowest level in nearly two years, the ninth straight month it has done so.

Geoff Bennett:

U.S. inflation rose 5 percent in March compared to a year ago. The price of groceries dropped three-tenths-of-a-percent last month, marking the first decline in that index since September 2020.

But core inflation, which does not include food and gas prices, remains high.

Gita Gopinath is first deputy managing director of the International Monetary Fund.

Thank you for being with us.

Gita Gopinath, Deputy Managing Director, International Monetary Fund:

Pleasure to join you, Geoff.

Geoff Bennett:

So, inflation has ticked down to its lowest level in nearly two years. It's still above where the Fed feels comfortable. Do we know yet when prices will fully level out or whether the economy can slow down without tipping into a recession?

Gita Gopinath:

So, Geoff, inflation indeed has come down from its real highs last year.

So we think that it peaked some time last year, and now it's been coming down. The issue, of course, is that it still stays very high. And especially if you look at the components of inflation that exclude energy and food, which is critical for figuring out how much of underlying inflation there is, that still remains high.

Now, it's coming down. We're seeing progress, but it is still slow. And there is some ways to go on that. Now, the question is, what does it take to bring it down? It requires slowing the economy. It requires slowing growth and demand, which is what the Fed is trying to accomplish with its interest rate increases.

But we will see how much more is needed on that front.

Geoff Bennett:

So, to your point, part of why the inflation picture is sort of hard to read right now is because you have different sectors moving in different directions.

Energy prices are down. Food prices continue to decline. The price of a used car has come down, but it costs more money now to buy a new car, and airfares are up 4 percent. They have soared. What accounts for that?

Gita Gopinath:

It is typically the case, when you look at inflation, that you see different inflation readings in different sectors.

And we have seen many changes over time. For instance, if you look at during the pandemic, goods inflation, things that you were buying, in terms of furniture and laptops and all of that, just soared because everybody was home and working from home, and that's the kinds of things they needed.

Now you see goods inflation has come down, but you see services inflation, because people are now going out to restaurants, and taking leisure of other kinds. And, because of that, you're seeing prices go up over there. And energy prices, which soared right coming out of the pandemic and Russia's war in Ukraine has now come down again. So we see very different trends, again, depending upon people's consumption behavior, and also geopolitical events.

Geoff Bennett:

The IMF, as you well know, warned of a — quote — "anemic outlook" for the economy due to higher interest rates, turmoil in the banking sector, the war in Ukraine, as you just mentioned.

Yet Treasury Secretary Janet Yellen yesterday rejected pessimism about the overall economy, and she said: "I wouldn't overdo the negativism."

Well, why the disconnect? What accounts for that?

Gita Gopinath:

I mean, firstly, we all recognize, even the IMF recognizes that the world economy has shown a lot of resilience against some very hard shocks, I mean, the pandemic, the war, with energy prices soaring.

So, despite all of that the labor market is tight, consumption spending is high. So there are bright spots, right? I mean, this is clearly the case. But, at the same time, we have to recognize that policymakers are trying to bring inflation down, which means they're raising interest rates, which is what you need to do to bring inflation down. The economy should slow.

And you saw in March the banking stress that triggered more financial tightening. So, therefore, I think the baseline is that we continue to have some growth, even if it's not the highest growth numbers. But the risks are weighted to the downside. We could see much more financial stress than we have seen. The war is not over. Energy prices could go back up.

So we just want to be cautious about just declaring victory and saying that we're all in a good spot.

Geoff Bennett:

It is safe to say, though, that the era of easy money is over, at least for now. I mean, the average interest rate for a 30-year fixed is 7.2 percent. What does that mean for the way that we live and work?

Gita Gopinath:

So, indeed, after a decade of very low interest rates, we are now in times where interest rates are much higher, which means mortgages are much more costlier, taking on car loans are much more costlier.

That, of course, has the effect of slowing demand for housing, slowing demand for cars. And that's the channel through which we expect to see demand slowing and then inflation coming down. Now, the question is, is that, once we bring inflation down, are we going to be there in this environment of high interest rates?

And, there, well, we — our analysis shows that, if you start looking about four to five years out, we do actually think you're going to return back to an environment of low interest rates of the kind we saw pre-pandemic.

Now, there's no certainty around it, but that would be our best estimate at this point.

Geoff Bennett:

Gita Gopinath is first deputy managing director of the International Monetary Fund.

Thanks for your time and for your insights.

Gita Gopinath:

Thank you, Geoff.