NEW YORK United States President Joe Biden has openly celebrated recent inflation reports, and US Federal Reserve officials have also breathed a sigh of relief as rapid price gains show signs of losing steam.

But the pressing question now is whether that pace of progress towards slower price increases – one that was long awaited and very welcome – can persist.

The Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) index, is expected to tick up to 4.2 per cent or 4.3 per cent in a report on Thursday, after volatile food and fuel costs are stripped out.

That would be an increase from 4.1 per cent for the core measure in June.

And while it would still be down considerably from a peak of 5.4 per cent last summer, such a reading would underscore that inflation remains stubbornly above the Fed’s 2 per cent goal and that its path back to normal is proving bumpy.

Most economists are not hugely concerned.

They still expect inflation to ease later in 2023 and into 2024 as Covid-19 pandemic disruptions fade and as consumers become less willing to accept ever-higher prices for goods and services.

US shoppers are feeling the squeeze of both shrinking savings and higher Fed interest rates.

But as price increases slow in fits and starts, they are keeping economic officials wary.

Big uncertainties loom, including a few that could help inflation to fade faster and several that could keep it elevated.

The Base Case: Inflation Is expected to cool

Price increases have slowed across a range of measures this summer.

The overall Consumer Price Index – which feeds into the PCE numbers and is released earlier each month, making it a focal point for both analysts and the media – has slowed to 3.2 per cent from a 9.1 per cent peak in June 2022.

And as consumers have experienced less drastic price jumps, their expectations for future inflation have come down.

That is good news for the Fed.

Inflation expectations can be a self-fulfilling prophecy: If consumers expect prices to climb, they may both accept cost increases more easily and demand higher pay, making inflation harder to stamp out.

Still, the moderation has not been enough for policymakers to declare victory.

Fed officials have been trying to slow the economy and contain inflation since early 2022.

Mr Jerome Powell, the Fed chairman, vowed during a speech last week at the Jackson Hole, Wyoming, symposium that they will “keep at it” until they are positive inflation is coming under control.

“Inflation is going the right way,” said Mr Gennadiy Goldberg, a rates strategist at TD Securities.

But it is like a fire, he said. “You want to kill its very last ember because if you don’t, it can flare back up in an instant.”

The Good News: Rents and China

There are reasons to believe that inflation is in the process of being sustainably doused.

Slower rent increases should help to weigh down overall inflation for at least the next year, several economists said.

Rents for newly leased apartments spiked in the pandemic as people moved and ditched their roommates.

Market-based rents began to cool in 2022, a shift that is only now feeding its way into official inflation data as people renew their leases or move.

The slowdown in inflation is also getting a helping hand from an unexpected source: China.

The world’s second-largest economy is growing much more slowly than expected after reopening from pandemic lockdowns. That means that fewer people are competing globally for the same commodities, weighing on prices.

And if Chinese officials respond to the slump by trying to ramp up exports, it could make for cheaper goods in the global marketplace.

And, more generally, Fed policy should help to pull down inflation in the months to come.

The US central bank has raised interest rates to a range of 5.25 per cent to 5.5 per cent over the past year and a half.

Those higher borrowing costs are still trickling through the economy, reducing demand for big purchases made on credit and making it harder for companies to charge more.

The Bad News: Petrol, travel prices, healthcare

But a few key products could spell trouble for the inflation outlook. Petrol is one.

American Automobile Association data shows petrol prices have popped to more than US$3.80 (S$5.15) a gallon, up from about US$3.70 a month ago, amid refinery shutdowns and global production cuts.

Fed officials mostly ignore petrol when they are thinking about inflation because it jumps around, thanks to factors that policymakers cannot do much about.

But petrol prices matter a lot to consumers, and their inflation expectations tend to increase when they pop – so central bankers cannot look past them entirely.

Beyond that, petrol prices can feed other prices, like airfares.

Nor is it just petrol and travel costs that could stop pulling inflation down so quickly.

Economists at Goldman Sachs expect healthcare prices to pick up as hospitals try to make up for a recent pop in their labour costs, propping up services inflation.

The Uncertain News: Cars and growth

Used cars have also been helping to subtract from inflation, but it is increasingly uncertain how much they will help to pull it down going forward.

Many economists think the trend towards cheaper used cars has more room to run.

Dealers have been paying a lot less for used cars at auction in 2023, and that trend may have yet to fully reach consumers.

Plus, some new car producers have rebuilt inventories after years of shortages, which could relieve pressure in the auto market as a whole. (Electric vehicles in particular are piling up on dealer lots.)

But, surprisingly, wholesale used car costs ticked up very slightly in the latest data.

“The used car market is turning, and the reason for that is pretty simple: Demand has been way higher than dealers had expected,” said Mr Omair Sharif, founder of Inflation Insights.

Add to that the possibility of a United Auto Workers strike – the union’s contract expires in mid-September – and risks lie ahead for car inventories and prices, he said.

In fact, sustained demand in the used car market is symptomatic of a broader trend.

The economy seems to be holding up even in the face of much higher interest rates.

Home prices have climbed since the start of 2023 in spite of hefty mortgage rates, and data released on Thursday is expected to show that consumer spending remains strong.

That more general risk – the possibility of an economic acceleration – is perhaps the biggest wild card facing policymakers.

If Americans remain willing to open their wallets despite swollen price tags and higher borrowing costs, it could make it difficult to tamp down inflation completely.

“We are attentive to signs that the economy may not be cooling as expected,” Mr Powell said last week.

NYTIMES