A closely watched inflation measure particularly cooled in November, good news for the Federal Reserve as officials head into the next phase of their fight against rapidly rising prices and good news for the White House as voters see relief from the rise costs.
The measure of inflation of personal consumption expenditures, which the Fed cites when it says it aims for average inflation of 2% over time, climbed 2.6% in the year through November. That’s down from 2.9 percent the previous month and less than economists had expected. Compared to the previous month, prices even fell slightly overall for the first time in years.
This drop – a drop of 0.1 percent and the first negative reading since April 2020 – came like gas prices abandoned. After removing food and fuel price volatility to better understand underlying price pressures, inflation increased slightly on a monthly basis, reaching 3.2% for the year. That’s down from the previous 3.4 percent.
While that’s still faster than the Fed’s target, the report provides the latest evidence that price increases are slowing rapidly toward the central bank’s target. After more than two years of rapid inflation weighed on U.S. shoppers and challenged policymakers, several months of solid progress helped convince policymakers they could turn a corner.
Increasingly, officials and economists think they may be in sight of an economic soft landing — one in which inflation returns to normal without a painful recession. Fed policymakers held interest rates steady at their meeting this month, signaled they may be done raising interest rates and suggested they might even cut costs borrowing three times next year.
“Inflation is slowing much faster than the Fed had anticipated, which could allow it to reduce it soon and more aggressively,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “They are really doing their best to ensure a soft landing here.”
Rising inflation is good news for the Biden administration, which has struggled to capitalize on strong economic growth and low unemployment at a time when high prices are eroding consumer confidence.
President Biden issued a statement celebrating the report, and Lael Brainard, director of the National Economic Council, called the slowdown in inflation an “important milestone” in a call with reporters.
“Inflation has fallen faster than even the most optimistic forecasts,” she said, noting that wage increases are outpacing price increases. Although she did not comment directly on monetary policy, citing the central bank’s independence from the White House, she noted that households are already facing lower mortgage rates as investors expect a more lenient Fed.
Based on market prices, the Fed should start drop in interest rates from March, even if those responsible having argued that it is too early to say when the rate cuts will begin.
“Inflation has declined from its peaks, and this has happened without a significant increase in unemployment – that is very good news,” Jerome H. Powell, Chairman of the Fed, said at that meeting. He nevertheless stressed that “the path forward is uncertain”.
Central bankers will likely watch closely for signs that inflation has continued to ease before considering when to start cutting rates. Some officials have suggested that keeping borrowing costs steady when price increases slow would further squeeze the economy. (Interest rates are not price-adjusted, so they rise after deducting inflation as inflation falls.)
Yet Fed officials have been reluctant to declare victory after repeated simulations in which price increases proved more persistent than expected, and at a time when geopolitical issues could complicate supply chains or send prices soaring. gas price.
“The more benign inflation data is certainly something to celebrate, but there is turbulence ahead,” Omair Sharif, founder of Inflation Insights, wrote in a note reacting to Friday’s data. “Fed officials will want to get through this before focusing squarely on rate cuts.”
Policymakers will also likely closely monitor consumer spending to try to determine the remaining momentum in the economy.
THE report published Friday showed that consumers continue to spend moderately. The measure of personal consumption rose 0.2 percent from October and 0.3 percent after adjusting for inflation. Both readings were faster than the previous month. This suggests that growth is still positive, although it is no longer as dynamic as it was earlier this year.
Officials still expect a sharper slowdown in the economy in 2024, a slowdown in demand that they say would pave the way for sustainably slower price increases.
After a year in which inflation quickly calmed despite surprisingly strong growth, economists are expressing humility. But decision-makers remain cautious about a situation in which growth remains too strong.
“If you have robust growth, that will probably mean that we will keep the labor market very strong; this will likely put some upward pressure on inflation,” Mr. Powell said during his speech. press conference. “This could mean it will take longer to reach 2 percent inflation.”
That, he added, “could mean we have to keep rates high for longer.”