The U.S. Bureau of Labor Statistics last week released Consumer Price Index data for June ahead of the Federal Reserve’s July meeting next week.
University of Central Florida’s Institute for Economic Forecasting Director Sean Snaith tells WMFE's Talia Blake that the report shows we’re heading in the right direction to bring down inflation nationally, but Florida continues to deal with unique problems.
Listen to the full conversation in the player above.
Talia Blake: Although inflation is a problem nationwide, the way it plays out in local economies can be different. How is inflation playing out in Central Florida right now?
Sean Snaith: Florida has been getting a little media coverage about our inflation here, which is higher than the national average, and that is primarily the difference. We buy the same energy that the rest of the country buys, food prices vary a little bit regionally, but generally, the thing that's making us stick out is the cost of housing/shelter. That inflation still remains at a double digit level, which is propping up that overall inflation number. So, this is a problem that has been brewing, I would say, as far back as 2015/2016, where we were just not building enough new housing to keep up with demand. Then there was the pandemic. And mortgage rates dropped below 3%. And maybe most importantly, the population growth that Florida and Central Florida has been experiencing, has just worsened that shortage situation in the housing market. In any market where there shortages, prices rise, and they rise more rapidly, the greater the shortage. So, yeah, unfortunately, I think that's going to be part of our landscape here for several years at least, because you just can't whip up housing the way you can an omelet to meet this demand.
Talia Blake: It sounds like until we get inventory up on housing, and all types of housing, Florida's inflation rate is going to be pacing above the national average?
Sean Snaith: I think so. I mean, certainly that housing component will. There's a couple of things that are impacting this inventory situation in Florida. Of course, one way to increase inventories is to build additional housing units, and that's happening probably not as rapidly as it should be. But another component of this in terms of of inventory and low inventories, is people are not willing to give up that 3% or sub 3% 30 year mortgage that they locked in on their home. So in normal course of events in the housing market, people's situation, change families form, additional children, pets, whatever. And so someone that may be in a starter house that in under different situations would be looking to move up the housing ladder, are less willing to do that, because now they give up, a 2.8% mortgage and have to take out one that 7%. While 7% is not high, historically, it's just by recent standards, you see, 'oh, wow, look how much my my payment is going to be if we, if we upgrade this house.' So that starter house that would be going back onto the market and under different conditions is not. So, there's kind of two sides to this squeeze on inventory.
Talia Blake: Speaking of spending, and moving up that housing ladder, since the pandemic we've seen a shift in spending from goods and services to more experiences. And I'm wondering what consumers are spending on these days here in Central Florida, we know it's not housing, because obviously, that we saw the housing problems. So what are consumer spending on these days?
Sean Snaith: As you just said, experiences. I think the pandemic, the lock downs, and the restrictions that sort of denied us of what a normal day-to-day experience would be that pent up demand, I think has been releasing itself here over the past couple of years. So people still going out to eat, going to the beach, theme parks, and attractions. Visitors come into the area for the for the same purpose. So, they're not buying per se as much, things like new living room furniture. Those are areas of consumer spending that we are seeing some weakness in and there's been some flashes lately. If you look at the past couple of months of the tourist development tax revenue in Orange County, that's actually declined somewhat. So, we may be approaching the end of this pent up demand and this travel binge in some ways. But it's also coupled with the fact that we've had two years of inflation that has eroded wages and salaries. Real wages and salaries have fallen over that period, which means that your paycheck is buying less. We've seen credit card balances reach new record levels. I think there's been this erosion and it's been gradual of consumers ability to spend. With inflation coming down, that will help lessen that that burden and lessen that erosion of real wages. And those wages are still growing. The totality of the labor market, if you look at all the other data and not focus on a data point here or a data point there, is it remains quite strong. Unemployment is very low. Wages and salary growth is at 4.4%. This may present a problem for the Fed in trying to get that inflation back down to 2% because if you have that tight labor market, you have strong wage growth, that can put a floor under and often put upward pressure on prices. There's a lot in motion right now, but I think the Feds on track when it comes to inflation. I think they'll likely raise interest rates when they meet later this month another quarter percentage point and perhaps another quarter percentage point before the years out. But the economy overall seems to be withstanding this. There was much expectation of a recession this year.
"We buy the same energy that the rest of the country buys, food prices vary a little bit regionally, but generally, the thing that's making us stick out is the cost of housing/shelter. That inflation still remains at a double digit level, which is propping up that overall inflation number."Sean Snaith
Talia Blake: The last time we talked about inflation, you said, you were kind of wary of a recession still happening. So how do you feel about it now with the latest numbers?
Sean Snaith: Well this recession reminds me of a Steve Miller Band song. This recession keeps on slipping and slipping and slipping into the future, to paraphrase Mr. Miller. I can't rule it out at this point. But here we are mid July, with no real definitive indication that we've slipped into recession. That doesn't mean it couldn't happen before the years out, and it may be the decision just being pushed further down the road, possibly into 2024. But given where we were and what expectations were as we started 2023, it's better than I think many thought it was going to be. I think there was kind of this pretty strong consensus that 'yeah, the Feds been tightening like crazy, this is gonna knock us into a recession.' Now, is a soft landing possible? I think that's back on the table as a possibility. I wouldn't have said that earlier this year, but it is a possibility.
Talia Blake: When you say soft landing, do you mean that by the time a recession might get declared, most people wouldn't have even noticed that it happened?
Sean Snaith: I think we had a recession in 2022. I think in the first six months of the year GDP declined over that half year period, but it didn't feel like it. Certainly didn't feel like the previous couple of recessions that we went through where we basically were falling off a cliff, and there was no mistake in it that the economy was in recession. But soft landing, in the general sense of that that term, is that the Fed is able to bring inflation down without triggering a recession. So like I said, I think that's back on the table, at least in my mind that this, that is a possible outcome. A fair amount of uncertainty still. But I think given where we were, and given how high inflation was this time last year, over 9% in August, the Feds made significant progress. And there hasn't been to date, a tremendous amount of damage to the to the real economy.
Talia Blake: The Federal Reserve's June meeting is next week, what do you expect to come out of that?
Sean Snaith: They took a pause in June. They didn't do anything. I think, and the markets largely concur, that they will raise interest rates at the July meeting later this month by a quarter of a percentage point. So, nothing dramatic. I think they're closing in on the terminal interest rate where they're going to stop hiking. I think that the data on inflation supports that. But, again, the works not done. They're gonna have to keep those rates at that level for an extended period of time just to make sure that inflation comes down and stays down.
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