Fed Expects a ‘Mild Recession’ This Year

By Yuval Rosenberg

Happy Wednesday! We’ve got updates on inflation,
the deficit and taxes. What more could you ask for? Send your wish
list to yrosenberg@thefiscaltimes.com.

Grocery prices fell for the first time since 2020.
(Reuters)

Inflation Falls to Lowest Level Since May 2021

Annual inflation continued to cool last month, falling to its
lowest level in nearly two years. The Labor Department said
Wednesday that its consumer price index rose by 5% year over year
in March, down from 6% in February and the ninth straight monthly
decline. Still, inflation remains well above the Federal Reserve’s
target rate, and so-called “core” inflation rose, making an
additional interest rate hike likely when the central bank’s
policymakers meet in May.

The consumer price index rose 0.1% from the prior month, down
from a 0.4% increase in February. The core CPI, which excludes
volatile food and energy prices, rose 0.4%, down slightly from
February. Over the last 12 months, the core index rose 5.6%, up
from 5.5% as of February — the first rise in that measure since
September.

“Today’s report shows continued progress in our fight against
inflation with the 12-month inflation rate at the lowest level
since May 2021,” President Biden said in a statement. “This
progress follows last week’s news that our job market remains
historically strong. Inflation has now fallen by 45% from its
summer peak.”

Grocery prices fell on a monthly basis for the first time since
September 2020. Egg prices, which jumped to record levels recently
because of an outbreak of avian flu, fell nearly 11% in March, the
biggest monthly drop
since 1987. And energy prices fell by 3.5% over
the month.

Shelter prices, which tend to lag other categories, continue to
climb. They were the largest factor behind the increase in the core
index, climbing 0.6% in March after rising 0.8% in February. “The
shelter index increased 8.2 percent over the last year, accounting
for over 60 percent of the total increase in all items less food
and energy,” the Labor Department said. Recent private-sector data
suggest that shelter prices have been moderating, though. That
should start showing up in the government reports eventually.

Fed economists project a mild recession: The newly
released minutes of the March meeting of the Federal Open Market
Committee showed that the Fed now expects the economy to dip into a
“mild recession” later this year due to turmoil in the banking
sector. Even so, investors now project a 70% chance of a
25-basis-point hike in May, down just slightly from yesterday,
according to the CME Group’s FedWatch Tool.

The bottom line: “Prices are still up,” Liz Ann Sonders,
chief investment strategist at Charles Schwab, told
The Washington Post. “They might be rising at a
descending rate, but the average consumer still sees that things
are getting more expensive than they were.” And Mickey Levy, chief
Americas economist for Berenberg Capital Markets, told the Post:
“Inflation may be gradually coming down, but people aren’t feeling
it yet.”

Deficit for the First Half of the Year Rose to $1.1
Trillion

The federal budget deficit for the first half of fiscal year
2023 totaled just over $1.1 trillion, according to a monthly report
released by the Treasury Department. That’s up 65% from the $668
billion shortfall for the same period in 2022.

The federal government posted a $378 billion deficit in March,
up from $193 billion for the same month last year. Adjusted for
calendar effects, the March deficit was $305 billion.

“The biggest drivers of deficits this year,” says
Reuters, “have been higher individual tax refunds
as the Internal Revenue Service works through a substantial backlog
of unprocessed returns amassed during the COVID-19 pandemic, and
lower Federal Reserve earnings.”

The Inflation Reduction Act Was Projected to Reduce Deficits.
It May Not.

Clean energy tax credits enacted as part of the Inflation
Reduction Act last year “are likely to be far more popular than
anticipated,” The Wall Street Journal’s Richard Rubin
reports. That could be good for the environment,
potentially helping to cut carbon emissions, but it may also raise
the cost of the credits by hundreds of billions of dollars — to the
point that the new law’s expected deficit reduction could be
completely wiped out.

Rubin cites “an emerging consensus of government and
private-sector forecasters” who now anticipate the tax credits to
be claimed at a much higher rate in large part because of the
growing popularity of electric vehicles. The forecasters reportedly
include those at Goldman Sachs, a Brookings Institution conference
and even the White House Office of Management and Budget (OMB).

“The Goldman and Brookings analyses contend that the tax credits
could cost American taxpayers three times as much as the $271
billion forecast when Congress passed the law,” Rubin reports. “The
OMB figure points in the same direction, though its estimates about
revenue from tougher tax enforcement—which are larger than
congressional projections—turn the law from deficit-increasing to
deficit-reducing.”

The bottom line: Whether the Inflation
Reduction Act ultimately reduces deficits, as Democrats had touted,
could depend on the use of those green tax credits and numerous
other factors, such as the return on additional funding for the
IRS. And, Rubin notes, Republicans may still look to undo the clean
energy tax breaks as they look to extend other tax cuts set to
expire in 2025.

These types of projections are often uncertain, but one thing is
clear: The political fight over the Inflation Reduction Act is far
from over.

Chart of the Day: A Record-Setting Year for Income Taxes

Americans paid a record share of their income — nearly 15% — in
income taxes last year, Bloomberg Opinion Columnist Justin Fox
writes.

“This record-setting income tax burden, and the sharp increase
since 2020 that brought it to this level, was not due to new tax
legislation taking effect during this period,” Fox writes. “It also
wasn’t really expected — the Congressional Budget Office
greatly underestimated how much income tax revenue
would flow into federal coffers last year. It seems to have been
the result of a pandemic asset-price boom interacting with
inflation, a progressive tax code and, in a few states, the
aftereffects of tax legislation enacted by Congress in 2017.”

Before you get too worked up, though, Fox adds that tax rates
are already headed lower and the 2022 rate will not be matched in
2023. Read
his column for all the details.

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