LEILA FADEL, HOST:
For more on the latest inflation data and what it means for consumers, we're joined by Caleb Silver. He's the editor in chief of the finance website Investopedia. Good morning, Caleb. Welcome to the program.
CALEB SILVER: Good to be with you.
FADEL: So inflation has cooled a bit, but the cost of living is still 3.4% higher than it was last year. Do you think that number will keep going down?
SILVER: I think it may stay kind of where it is. But if you ask most American households, is inflation at 3.4%? - they're going to say that feels kind of low, given the fact that the price of everything that we kind of need to spend money on continues to rise or just not fall that dramatically. And we're feeling it every single week, whether we're filling up at the gas pump or buying groceries. Everything just feels more expensive than it did last year, but certainly a lot more expensive than it did several years ago. So it's just mounting inflation year over year, month after month, and it doesn't seem to want to go away.
FADEL: Now, we heard about this drop in price on lettuce because of this extenuating circumstance. Did anything else, though, stand out to you in this report?
SILVER: Well, lettuce - can't live alone on lettuce. So if...
FADEL: Right.
SILVER: ...You look at some of the other things that have dropped, it's things like used cars and trucks and potentially medical care commodities. But when we're talking about the things that we have to buy - right? - the needs that we buy on a week-in, week-out basis, those continue to remain sticky high. And I think retailers have figured out that price elasticity is kind of here to stay. We're used to paying these higher prices, and they have higher input prices themselves. So they've been able to pass it on to consumers, and we continue to spend even though we're going deeper into debt to do it.
FADEL: Now, a lot of this has to do with the war in Iran. Gas prices are extremely high for Americans. But even if that ends tomorrow, how long do you think it will take for prices to start coming down?
SILVER: You'll see it at the pump within a week or two weeks. And gas prices and oil prices, in general, have a way of rocketing up higher and then dropping like a feather. But roll the tape back to 2019. I know that's seven years ago. But price increases have been super dramatic in things like groceries, which are up 33% since then. Shelter's up 35%. Family health insurance - up 38%. So all the things that used to feel like we - could be affordable have risen in price. And plane tickets that used to cost $350 are now $450. And I think we've gotten used to those higher prices, and so have the companies that sell us those services and goods.
FADEL: The Fed hasn't raised rates yet even though inflation is higher than it would like. Why?
SILVER: Because raising rates right now, especially when the job market seems vulnerable - and we learned that in July's jobs report - would probably have the opposite impact. That could actually spur inflation or at least slow the labor market. So the Fed's in a tricky place here. Kevin Warsh, the new Fed chair, says the Fed is very singularly focused on inflation - keeping it down or bringing it down to 2%. Well, we've had 64 straight months of inflation over 2%, and I don't think anybody really feels like we'll ever get back down to 2%.
So if prices fall dramatically, then we have disinflation or potentially deflation, and that's a sign that the economy's in really bad shape. So the Fed's in a tricky spot here and seems to want to wait and see what the financial markets do before it makes its next move.
FADEL: Do you think White House pressure is playing any role in the decisions that the Fed is making?
SILVER: Well, Kevin Warsh says the Fed will remain independent, but we know the president would like lower interest rates for a variety of reasons. But right now lowering rates or raising rates seems like a tricky move either way. If you raise rates right now, you're going to make it - borrowing costs even harder for companies, who will probably not hire as much or start to trim jobs. So they're in a tricky spot there.
In terms of prices, well, sometimes the cure for higher prices is higher prices. Eventually consumers and businesses tap out. We haven't reached that point yet. We continue to spend. We feel terrible about it, but we're just driving ourselves deeper into credit card debt. And household balance sheets are actually in decent shape compared to, say, where we were back in the great financial crisis.
FADEL: Well, make that make sense when you say everything's more expensive, it's feeling terrible for Americans, but they're still spending. And balance sheets are OK?
SILVER: Yeah. Balance sheets are OK even though we're driving ourselves deeper into debt. But we don't have the type of people defaulting on their mortgages, defaulting on their car payments. That's starting to rise a little bit, but it's not in red-alert territory. So you feel the pressure. And people feel terrible if you listen to consumer sentiment, if you listen to consumer expectations, but we still continue to spend. A lot of that is driven by the wealthier households. But all households are sort of forced to spend into this higher-price regime that we've been in for, as I said, 64 months.
FADEL: Do you worry about any other pinch points in the coming months if the cost of living keeps going up?
SILVER: Yeah. If the cost of living keeps going up and people are not able to get by week after week, you're going to see people starting to default on their credit card loans, starting to default on their mortgages, and that could send the economy into a tailspin. Right now we're heading into slower growth with higher prices, and that's stagflation. That was the 1970s. It's not extreme yet, but it could get there.
FADEL: Caleb Silver is editor in chief of Investopedia. Thank you, Caleb, for your time and your insights.
SILVER: Thank you. Transcript provided by NPR, Copyright NPR.
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