Latest inflation data shows intact, but volatile, cool-down

Latest inflation data shows intact, but volatile, cool-down


Consumer price data released Thursday showed that Federal Reserve officials, the White House and U.S. households continue to expect inflation to slow into late 2023, a year of price increases that has left households and policymakers seriously worried about cooling off the economy. Gave.

Prices rose more rapidly in December than in November on an annual basis: 3.4 percent versus 3.1 percent earlier, which was more than economists in a Bloomberg survey had forecast.

But after stripping out volatile food and fuel prices to understand the underlying inflation trend, the “core” price measure climbed 3.9 percent in the year through December, up from less than 4 percent earlier. For the first time since May 2021, the core index has fallen below 4 percent.

The data underscores that while inflation remains faster than usual — and month-to-month jumps are still possible due to fluctuations in gas prices and other volatile costs — the measure is making progress toward a normal pace. This is likely to come as welcome news to central bankers and President Biden after nearly three years of rapid price increases that have raised costs for consumers and put pressure on many household budgets.

“We’ve seen how volatile data can be,” said Gregory Daco, chief economist at EY-Parthenon. “There is significant momentum really at the core level, and what we are seeing at the core level on a three or six month basis is really encouraging.”

Some underlying details may make Fed officials cautious as they look toward 2024. The slowdown in rents for new leases is only slowly creeping into the wider housing market. And while the cost of some goods and services is coming down significantly, the price tags on products like auto insurance continue to rise quite rapidly.

But many economists expect inflation to continue to moderate in the coming months as expected shelter price increases are tempered and the economy overall returns to a more normal pattern.

Whether that happens will determine what happens next from Fed policymakers.

Fed officials have raised rates significantly to try to slow economic growth and keep inflation under control: Their key policy rate is now from 5.25 to 5.5 percent, up from near zero as recently as early 2022. But with inflation low, central bankers may begin lowering interest rates to more normal levels this year.

His job now is to balance two goals. On the one hand, they want to ensure that inflation is completely under control. On the other hand, they do not want to keep borrowing costs too high for too long, which would risk a recession that would lead to job losses and increased unemployment.

Policymakers have indicated that they may cut interest rates three times in 2024. They’re not yet ready to completely rule out the possibility of another rate hike before reversing course, but investors and many economists think their next move will be to keep rates low — perhaps until March.

For the Fed, Thursday’s report is a reminder to tread carefully, said Oscar Munoz, chief U.S. macro strategist at TD Securities. He expects central bankers to wait until May to lower borrowing costs, giving them more time to see if inflation is truly over.

“They need to be a little more patient,” Mr. Munoz said.

Fed officials have pushed back expectations of an imminent rate cut in recent weeks.

“If we do not maintain sufficiently tight fiscal conditions, there is a risk that inflation will rise again and reverse the progress we have made,” said Lori Logan, president of the Federal Reserve Bank of Dallas. in a speech On 6th January.

For consumers, slower inflation means that the prices of many everyday purchases – from items like furniture to services like rent – ​​are no longer rising as fast. The price of some products is actually decreasing, although for the most part, price levels remain higher than a few years ago.

Wages are growing at a solid pace, which should help consumers catch up. average hourly earnings climb fast On an annual basis, compared to the overall consumer price index from last summer. In fact, both consumer prices and average hourly earnings have increased since February 2020 approximately the same amount,

As consumers are moving forward, they are also becoming a little more optimistic. many measures Consumer confidence has seen a recent improvement, and while share of families They say their financial situation is worsening compared to 2019, having declined in recent months.

And at the White House, the decline in inflation – and improving sentiment among Americans – is a welcome development.

“We ended 2023 with inflation nearly two-thirds below its peak,” Mr. Biden said in a statement after the release. “Despite what many forecasters were predicting a year ago, inflation is down while growth and the job market remain strong.”

Economists will now keep an eye on the release of the personal consumption expenditure index, which the Fed officially targets when it says it aims for 2 percent annual inflation. This measure draws some data from the Consumer Price Index but is released with a greater delay, and is determined to Published on 26th January,

Omair Sharif, founder of Inflation Insights, said the continued cool-down in the Fed’s preferred measure is likely to be particularly pronounced because of the way the data is calculated.

And in the consumer price index, they expect housing prices to ease in the coming months – an important step towards reducing residual inflation.

“I think we are on the verge of a long-awaited reduction in shelter costs,” he said, noting that the measure tracking residential rents declined in December. “were very close.”



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