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Inflation has been easing but not as quickly as consumers and the Fed would like

STEVE INSKEEP, HOST:

Inflation is moving in the wrong direction - this according to the government, which released a report this morning showing annual inflation - the annual rate - at 3.5%. NPR's Rafael Nam joins us now. He's 100% in our studios. Good morning, sir.

RAFAEL NAM, BYLINE: Hey, Steve.

INSKEEP: OK. What makes 3.5% inflation a concern?

NAM: Mainly because, once again, inflation was a little hotter than expected. This was actually the third month in a row where inflation came in a little higher than what economists had expected.

INSKEEP: Oh, yeah.

NAM: Now - yeah, some context here - yes, inflation is still lower than it was just two years ago when inflation hit over 9%. That was the highest in decades. So 3.5% - well, compared to that, it's not too bad. The problem is that this levels of inflation still feel high for a lot of people.

INSKEEP: Why?

NAM: Because when you drill down on the number, you see the cost of necessities, like electricity, gas, rent - they're all kind of running hot, and those are things that people can't live without. I've been talking to people from California to Florida this week, and they are all - they all mentioned the same things. What I heard were complaints about high rents, the high cost of insurance and service costs. And by that, I mean things like eating out. Those are really expensive. And of course, gas prices are high, too, and they impact people directly. What's causing that? It has a lot to do with unstable geopolitics - think the Middle East - and oil producers are also producing less oil.

INSKEEP: I'm thinking about two aspects of this. One is the psychology. Even if inflation is down, the prices that went up a couple of years ago - people remember that things are more costly than they used to be. The other is 3.5% is not where the Fed wanted inflation to be. What does that mean for their effort to bring down interest rates this year?

NAM: It's going to make the fight a lot, a lot harder. I mean, it's a big reason why markets were hit hard as soon as trading opened this month. Listen, the Fed has made clear it wants evidence that inflation is easing more consistently. If you remember, last month, the Fed had projected it would cut rates three times this year. That's now in doubt because inflation hasn't fallen enough yet. And the timing of rate cuts are also up in the air. Bottom line here - interest rates are likely to stay high for a little bit longer, and they are high - at their highest in over two decades.

INSKEEP: OK, given that the expectations are out the window, what is the sense of what might determine when interest rates can be dropped?

NAM: Well, that's the big question. And there's still a lot of uncertainty about it. And that's why this morning's inflation number was so important. It could help determine how much longer the cost of money stays this high. And clearly, that has big implications to anybody who wants to buy a home or has big credit card debt. Mortgage rates are still above 7%, and there are some signs that people are falling behind on credit card payments.

But there is a silver lining. There's a big reason why inflation is running higher than expected. Employment is strong. Wages are rising faster than inflation. And these are two clear signs of one important thing people should keep in mind - the economy is doing well. But it won't feel that way as long as the inflation continues to stay this high.

INSKEEP: NPR's Rafael Nam in our studios. Thanks so much.

NAM: Thank you, Steve. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Michel Martin is the weekend host of All Things Considered, where she draws on her deep reporting and interviewing experience to dig in to the week's news. Outside the studio, she has also hosted "Michel Martin: Going There," an ambitious live event series in collaboration with Member Stations.
Rafael Nam
Rafael Nam is NPR's senior business editor.
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