Tuesday’s inflation report indicated a moderate increase in prices for November, signifying a substantial decrease in inflation from its high in June 2022. This is likely to encourage the Federal Reserve to keep interest rates steady at their final meeting of the year, happening this week.
As the two-day meeting of the Federal Reserve started, the Consumer Price Index was released. The meeting will conclude with an interest rate decision and fresh quarterly economic projections at 2 p.m. on Wednesday, followed by a news conference held by the Fed chair, Jerome H. Powell.
Central bankers welcomed the recent downturn in price increases and, according to Tuesday’s data, inflation continues to be lower than earlier in the year. Total inflation rose by 0.1 percent monthly, translating to an increase of 3.1 percent compared to the previous year.
This was lower than October’s 3.2 percent and significantly less than the summer of 2022’s high of over 9 percent.
Despite the overall moderation, certain elements within the report may provoke caution among Fed officials as they consider future interest rate adjustments. Investors predict the central bank will begin reducing borrowing costs in the first half of 2024, although officials have been seeking to preserve all options.
After excluding unpredictable food and fuel prices to provide a clearer view of inflation trends, core inflation rose faster on a month-to-month basis. One key measure that tracks housing expenses also increased faster. This measure, known as “owners’ equivalent rent,” estimates the rental cost for a homeowner’s property, and has been expected to decrease.
“This reinforces the notion that the road to disinflation is going to be uneven,” stated Blerina Uruci, chief U.S. economist at T. Rowe Price. “The Federal Reserve cannot prematurely reduce interest rates considering the persisting services inflation.”
Core inflation remained steady at four percent from the previous year, considerably higher than the roughly two percent rate typical before the pandemic.
Most economists anticipate inflation will continue to decline in 2024.
This is partly tied to the Federal Reserve’s monetary policy. Between March 2022 and the summer, officials greatly increased rates to slow down the economy, aiming to decrease demand and lower inflation. The increasing difficulty of borrowing for major purchases has led to a slowdown in the housing and car markets.
Regulatory measures have been supported by the economic supply side. Logistics routes jammed during the pandemic are now clearer, and factories have adjusted to meet demand, lessening deficits for essential products. As a result, the prices of goods have decreased recently.
With employees returning to work and filling vacancies, wage advances have started to cool, implying that industries heavy on labor costs might stop raising their prices as rapidly.
For several months now, Federal officials have maintained borrowing costs steady as they try to evaluate whether they have adjusted policies sufficiently to stabilize price increases over time.
“They should be quite encouraged,” suggested Neil Dutta, head of economic research at Renaissance Macro, after the report. “Inflation is dropping faster than they predicted, and the new data continuation doesn’t change that.”
However, central bankers have been reluctant to celebrate too soon, considering inflation remains high despite the improvements. Economists expect them to continue this cautious strategy this week, regardless of widespread belief that the Federal Reserve’s next step will be to cut interest rates.
“Stating with certainty that we have sufficiently tightened, or speculating about when we might loosen monetary policy, would be premature,” Mr. Powell said in a recent speech.
Investors anticipate borrowing costs could reduce as early as the first half of 2024, according to market projections, though continuous economic momentum or persistent prices could postpone this.
“The persistent housing costs in Tuesday’s report probably delay any expected reductions to later in the year,” Ms. Uruci suggested. Policymakers will be hesitant to change direction while price increases could remain at elevated levels.
Predicting how quickly inflation will fade has become challenging, as it has repeatedly confounded forecasters since 2021 by briefly waning before resurging.
“Being confident after the past few years is difficult,” Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, admitted.
Inflation Remains Relatively Stable Before Fed Meeting
