High inflation remains top issue as economic forecasts dim for 2023

Inflation was top of mind for economists on Wednesday, as they shared their predictions for the future of the national and Nevada economy at an event hosted by the UNLV Center for Business and Economic Research (CBER).

Mary Daly, president and CEO of the Federal Reserve Bank of San Francisco, described the national economy as a mix of positives and negatives, pointing to a robust job market and strong household and business balance sheets that are coexisting with rising costs of food, housing and gas.

Balancing those two sides of the economy — jobs and prices — is the “dual mandate” of the Federal Reserve (Fed), which aims to ensure maximum employment and low and stable inflation.

A combination of extreme world events has thrown that balance out of order. With the COVID-19 pandemic came massive job losses, including record-high unemployment in Nevada. But as the nation’s economy recovered and the unemployment rate declined — in part because of federal stimulus money that infused billions of dollars into the economy — demand for goods skyrocketed, and supply has not been able to keep up. 

The economy continues to suffer from rising prices as prolonged effects from the pandemic and now the war in Ukraine contribute to global supply chain issues. In March, the annual inflation rate, which measures the rate at which prices of common goods and services are rising, hit 8.5 percent, a 40-year high.

High unemployment remains an issue in Nevada, which has the country’s second-worst headline unemployment rate (5 percent in March). But that rate continues to decline steadily, and national employment has almost fully recovered.

Meanwhile, economists at the Fed have turned their focus to inflation, a key issue for voters in Nevada and across the country.

The Fed is already taking action to address rising prices. In March, the group approved the first federal funds interest rate hike since 2018, raising the rate from 0 percent to a range between 0.25 percent and 0.5 percent. Rates were initially slashed during the pandemic to help the ailing economy, but the increase — which makes consumer borrowing and credit costlier — is meant to bring down inflation by bringing down demand.

Still, Daly cautioned that the Fed must slowly increase interest rates to avoid a repeat of the “stagflation” of the 1970s and ‘80s, when the agency rapidly raised interest rates to combat a sustained period of high inflation, which ultimately resulted in a deep economic recession. 

Even as economic policy makers at the Fed remain mindful of high inflation’s effect on consumers, other speakers cautioned that an economic downturn — or at least, significantly slowed economic growth — is on the horizon.

Douglas Duncan, chief economist at Fannie Mae, a government-sponsored mortgage loan company, pointed to economic forecasts that predict a moderate recession in the second half of 2023. Duncan expressed concerns about how inflation has eroded personal income, even in the midst of rising wages, and pointed to past data that shows how Fed interest rate increases usually come before economic downturns. 

He also said he sees unemployment trending upward next year, but described those predicted future economic conditions as “a pretty mild recession.”

Mortgage rates continue to rise

Myriad factors are contributing to declining affordability in the housing market, Duncan said, as with rising mortgage rates, increasing home prices and limited supply are all making home-buying more difficult.

After the Fed raised interest rates, mortgage rates have surged this year, jumping to 5 percent from closer to 3 percent at the start of the year. At the same time, housing prices continue to rise across Nevada. In Las Vegas, median home sale prices have risen about $150,000 since the beginning of the pandemic, most recently climbing to $460,000.

“As those interest rates are rising, and house prices are still appreciating, it just puts more squeeze on affordability,” Duncan said.

Despite those issues, Duncan said he expects there could be some inflation-adjusted price declines by the end of next year, which would “readjust that relationship between the sales price of the median single-family house and median household incomes.”

Still, home sales could slow more in the near future, especially as buyers await the completion of construction. This year, the supply of existing single-family homes hit a record low.