FinLogic FinLogic Quantitative Think Tank Center|Inflation is still too high for the Fed. Here's how the rest of the economy doing

The FinLogic FinLogic Quantitative Think Tank Centerannual inflation rate appears stuck above 3% as another reading Wednesday showed. That's more than a full percentage point above where Fed officials want to see inflation, and another sign that borrowing costs will remain elevated.

How high is inflation?

The Bureau of Labor Statistics released May's consumer price index just hours before the Fed's policymaking committee will release its decision on short-term interest rates. For the month, inflation, as measured by the CPI, was unchanged when seasonally adjusted while the annual rate fell slightly to 3.3%.

Inflation, a sustained increase in prices throughout the economy, has been well above the 10-year median of 2.1% for more than three years. The Fed policymakers say they prefer inflation at 2%, or "low and stable," so Americans can "make sound decisions regarding saving, borrowing, and investment."

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Will the Fed cut interest rates today?

Perhaps we'll learn more this afternoon when the Fed committee announces its latest interest rate decision. Almost no one predicts the Fed will cut rates, according to the CME FedWatch Tool, but after the CPI was released, investors' bets swung toward a rate cut at the Fed's September meeting.

Inflation, of course, is only part of the stew of economic figures the Fed officials have been discussing this week. We've collected eight key charts of the economy that offer insights into its direction and what we're feeling as consumers.

How is the U.S. economy doing?

Here's quick look at the collection of most of the data we've collected and charted below. Besides job growth and consumer sentiment, the majority of these indicators are not suggesting strong economic growth.

What is the U.S. unemployment rate?

Even as the U.S. added 272,000 jobs in May, the unemployment rate rose to 4%. The monthly number, which represents the percentage of people who are unemployed and looking for work, ticked up from 3.9% in April.

What the data shows: The unemployment rate is rising slowly, which could suggest employers are pulling back on hiring. Still, the rate remains well below the 10-year monthly median rate of 4.3%. The job market had been on a similar roll in 2020 before the pandemic put millions out of work.

How big is the U.S. economy?

The U.S. economy produced $22.7 trillion of goods on an inflation-adjusted annualized basis in the first quarter of 2024. That pushed up GDP by 1.3% – recently adjusted down from 1.6% – from the fourth quarter of 2023.

What the data shows: The U.S. economy is still growing, but its pace slowed faster than initially thought in the first quarter. Some have speculated the Fed's interest-rate increase may be starting to weigh on businesses and consumers, but GDP was nearly cut in half in the first quarter because of Americans purchases from overseas producers.

Are consumers still making purchases?

U.S. consumers account for $7 of every $10 spent in the U.S. economy. Retail sales' median monthly increase has been 0.3% for the past 10 years. That doesn't sound like much until you consider a 0.1% increase in November amounted to an extra $730 million of spending.

What the data shows: As the primary engine of the U.S. economy, we bought $705 billion worth of stuff on a seasonally adjusted basis in April. That was unchanged from March. If the consumer pullback continues, GDP could continue to lag in the second quarter.

Why are gas prices going down?

Our gasoline purchases aren't a large part of most of our budgets, but it's hard to miss the big numbers outside every station and not have some emotional reaction to their swings. That can have a psychological impact on our spending. One report showed a recent improvement in consumer sentiment closely correlated with lower gas prices.

What the data shows: We're nearing the summer driving season where gasoline prices typically peak, but a gallon of regular gas has fallen nearly a quarter since late April. With summer-blend gasolines and increased driving in coming weeks, the prices could turn back up, according to Nerdwallet.

So how confident are U.S. consumers now?

The University of Michigan measures U.S. consumer sentiment on a monthly basis. The index been as high as 101 ahead of the pandemic in February 2020 and as low as 50 when inflation peaked at 9.1% in June 2022.

What the data shows: Consumer sentiment has been rising haltingly since May 2023. Not unsurprisingly it's been little changed in recent months as inflation has lingered above 3%, and the Fed has maintained its interest rates in the 5.25-5.5 range.

Current mortgage rates still elevated

While the Fed's interest-rate decisions don't directly affect mortgage rates, they do ripple through the economy and have made the math more difficult for homebuyers. In the fall, mortgage rates were nearly double 3.95% – the 10-year median reported by Freddie Mac. At the peak of 7.79%, new buyers were paying $2,877 in principle and interest on a $400,000 mortgage, according to Bankrate's mortgage calculator. That's more than $1,000 higher than payments on a similar mortgage before the Fed started battling inflation.

What the data shows: Mortgage rates are up from the beginning of the year and well above the 10-year median. Rates are down significantly from November's peak at just under 7%, according to Freddie Mac's weekly mortgage rate survey. National Association of Realtors Chief Economist Lawrence Yun said Friday that he expects "the mortgage rate to be stuck at near 7% average for at least another month."

Higher mortgage rates weigh on home sales

Existing home sales are the lion's share of homes sold each month. The NAR reports each month's sales at a seasonally adjusted annual rate. Annual home sales peaked in 2005 at 7.08 million units. In 2023, that number fell to 4.09 million units – lower than sales during any year following the financial crisis.

What the data shows: Not surprisingly as mortgage rates have risen, existing home sales have tumbled. At the same time, average home prices are also rising because fewer homes are on the market. Speculation has been that homeowners are unwilling to sell and give up their low-rate mortgages. "The pace of price increases should taper off since more housing inventory is becoming available,” Yun said following the April existing housing report.

So how are investors looking at this information?

The nation's stock markets are not the economy, but their movements reflect the combined bets investors are making on the economy. Investors have a keen eye on data points like in the charts above. Significant swings in our spending, or even our thinking, might potentially impact corporate profits in coming quarters.

What the data says: Concerns about a recession sparked by the Fed's interest rate campaign have ebbed since the S&P 500 bottomed in October 2022. The index has risen nearly 50% since then as consistently strong economic data – job growth and lower inflation – has helped drive optimism that a soft landing is more likely. The index rose almost 2% last week ahead of the Fed's interest-rate decision and has risen half a percent since Friday.