Fed Rate Cut: Will Prices Ever Go Back To ‘Normal’?
Inflation may have (nearly) returned to normal. But prices don’t feel normal.
The Federal Reserve cut the federal funds rate by 50 basis points in September as inflation has moved closer to its 2% target. This was the first rate cut since the onset of the pandemic and might be a turning point in the Fed’s years-long battle to get prices under control.
Despite the Fed’s move, though, average Americans are feeling downright crabby about the economy, according to recent surveys, even as wages have climbed. With the prices of many goods and services still much higher than before the pandemic, it’ll likely take much longer for prices to not seem so out of hand.
“Eventually we will adapt,” says Moody’s Analytics economist Matt Colyar. “But it’s going to take time.”
The State Of Overall Prices
The Fed’s preferred gauge, the personal consumption expenditures (core PCE) price index that strips out food and energy costs, was up 2.7% in August over the past 12 months and has declined sharply from levels in 2022. The central bank expects inflation to hit 2.2% next year before dropping to its 2% target in 2026.
So inflation is under control, right?
Well, the pace of price growth may have slowed, but it amassed a lot of damage in its wake. Another inflation metric, the more widely covered consumer price index (CPI), shows that prices gained 22% between January 2020 and August 2024.
Wages, though, have risen as well.
While prices gained 22%, weekly earnings went up by almost 24%, according to monthly data from the Bureau of Labor Statistics. Meanwhile, median annual household income hit $80,600 in 2023, per the Census, up about $3,000 from 2022.
“People are getting paid more, and paying more,” says Jeffrey Roach, chief economist for LPL Financial, a financial services company that supports financial advisors.
Still, that doesn’t mean all families aren’t feeling the financial burn.
Earnings, after adjusting for inflation, dropped in 2020, 2021 and 2022. In fact, the typical family made $81,210 in 2019 (using today’s dollars), or about $600 more than in 2023.
Even if families saw their paycheck rise above inflation in 2024, it’s not surprising that many are more pessimistic about their finances than economists might expect.
The Gallup Economic Confidence Index has shown a negative number since July 2021, while the Conference Board’s Consumer Confidence survey dropped to a nearly two-year low this August.
While concerns about inflation would likely improve if it continued to hew more closely to 2%, American spirits could be dampened if the labor market continues to slow down.
That was the rationale behind the drop in consumer confidence in August, per the Conference Board, and the Fed deciding to cut rates during its September meeting.
Even though price growth is decelerating, inflation is still above the Fed’s target. It’ll likely take many months, if not years, of stable prices for consumers to feel secure.
Below is a more detailed look at three major areas of your budget to see just how long that may take.
The State of Gas Prices
Gas and grocery prices tend to be volatile; that’s why economists look at inflation metrics that exclude them. Since 2020, though, they’ve vexed consumers.
A gallon of gas cost $2.57 heading into 2020, according to the U.S. Energy Information Agency, compared to $3.19 now on September 23. That’s a 24% increase, which largely tracks wage growth.
But it’s hardly been a straight line.
Gas fell to $1.77 in April 2020 at the beginning of the pandemic shutdowns, and hit $5.00 in June 2022 after Russia invaded Ukraine before falling to its current level.
But it’s difficult to say what is and isn’t normal when it comes to gas prices.
Between the end of 2014 and 2020, a gallon of gas never rose above $3. However, it cost more than $3 for almost all of the time between 2011 and 2014.
Therefore the price of gas, in its twists and turns, has been entirely normal, albeit higher than many would like to spend.
The State of Food Prices
The August CPI report showed that grocery prices gained 2.1% over the past 12 months, signaling that food prices were becoming more normal.
But zooming out from that report shows just how much more expensive your grocery shopping has been over the past four years compared to recent history.
The cost of nearly every major food item, save tomatoes, rose faster between August 2020 and August 2024 than between August 2016 and August 2020.
Eggs are a particularly glaring example: A dozen eggs cost $1.46 in 2016, $1.33 in 2020 and now $3.20.
Your grocery bill will need many more months of low inflation to feel more normal, but you shouldn’t expect prices to ever go back to 2020 levels.
The State of Owning A Home
While groceries and gas are constant reminders of price changes, neither bears as much weight on your finances as home ownership: Nearly two-thirds of Americans own a home, according to the Fed’s 2024 Report on the Economic Well-Being of U.S. Households.
Purchasing a home was largely affordable in the years between 2009 and 2020, according to a Forbes Advisor analysis of the Atlanta Fed’s Home Ownership Affordability Monitor, thanks in large part to low mortgage rates following the Great Recession.
The tide turned in 2022, though, as mortgage rates soared following the Fed raising interest rates to tamp down inflation.
Prices also climbed thanks to a lack of available homes for sale, says National Association of Realtors chief economist Lawrence Yun.
“We have had a lack of housing supply, which is why prices increase so much faster than income growth,” Yun says.
Many existing homeowners are unwilling to give up their low mortgage rates and are staying put. Meanwhile, builders have been cautious with construction for new homes when so many potential buyers are priced out.
The good news is that borrowing costs have fallen from recent highs—the average 30-year fixed rate was 6.09 in mid-September compared to 7.8% in the fall of 2023. And they may have a bit further to drop in the near future.
“Rates will probably be around 6% by the end of this year,” Yun says. “Next year they might be slightly under 6%, maybe 5.50%.”
Just don’t expect the abnormally low mortgage rates that spurred so much demand in the early part of the pandemic to come back anytime soon.
Written By: Taylor Tepper
Senior Writer, Banking and Investing
Sep 30, 2024, 4:53am
