Inflation data released Tuesday showed that price increases remained moderate in November, the latest sign that inflation has slowed significantly from its peak in June 2022. This should allow the Federal Reserve to remain on track to leave interest rates unchanged at its final meeting of the year, which takes place this week.
The consumer price index was released just hours before the start of the two-day Fed meeting, which will conclude with the release of an interest rate decision and a new set of quarterly economic projections Wednesday at 2 p.m. Jerome H. Powell, Chairman of the Fed, is then scheduled to hold a press conference.
Central banks have embraced a recent slowdown in price inflation, and data released Tuesday largely suggests inflation remains lower than earlier this year. Headline inflation rose 0.1 percent on a monthly basis, an increase of 3.1 percent from the previous year.
This figure was colder than 3.2% in October, and is significantly down from the peak above 9% reached in summer 2022.
But some underlying details in the report could make Fed officials wary as they consider what to do next on interest rates. Investors expect central bankers to start reducing borrowing costs in the first half of 2024, even as officials try to keep their options open.
After excluding volatile food and fuels to give a clearer picture of underlying inflation trends, so-called core inflation rose faster on a monthly basis. And a closely watched measure that tracks housing spending has also grown faster; This measure is called “owner’s equivalent rent” because it estimates how much it would cost someone to rent a home they own, and economists expected that amount to decline.
“This reinforces the idea that the path to disinflation will be bumpy,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “The Fed can’t cut interest rates too soon in the face of resilient services inflation.”
Core inflation rose 4 percent from a year earlier, remaining stable since October. This rate remains well above the normal rate of around 2% before the start of the pandemic.
Many economists expect inflation to continue falling in 2024.
This partly depends on monetary policy. Fed officials raised rates sharply between March 2022 and this summer in an effort to slow the economy, hoping to cool demand enough to combat inflation. As it has become more expensive to borrow for large purchases, the real estate market has cooled somewhat and the auto market has calmed.
Policymakers also benefited from help from the supply side of the economy. Shipping routes were clogged during the pandemic but have since cleared, and factories have caught up with demand, easing shortages of some key products. The return to normal has helped drive down property prices in recent months.
And as workers return to the job market, filling vacant positions, wage gains have slowed — which could suggest that labor-intensive service sectors will stop raising prices as quickly.
Fed officials have been holding borrowing costs steady for several months, trying to gauge whether they have adjusted policy enough to return price increases to a normal pace over time.
“They should be very encouraged,” Neil Dutta, head of economic research at Renaissance Macro, said following the report. “Inflation is falling much faster than expected, and the new numbers don’t change that.”
Yet central bankers are hesitant to declare victory at a time when inflation is improving but remains high. Economists expect them to continue this cautious approach this week, although many believe the Fed’s next move will be an interest rate cut.
“It would be premature to conclude with certainty that we have reached a sufficiently restrictive position, or to speculate on when policy might be eased,” Powell said at the news conference. a recent speech.
Investors believe borrowing costs could fall as early as the first half of 2024, according to market expectationseven if the continuation of economic dynamics or the persistence of prices could delay this development.
Ms Uruci said the stickiness in housing costs in Tuesday’s report would “likely push out expected reductions until later in the year”. Policymakers will not want to reverse the trend at a time when price increases could remain stuck at a still high rate.
Inflation has surprised forecasters several times since 2021 by cooling and then rising again, making it now difficult to predict how quickly it will ease.
“It’s hard to be confident after the last few years,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives.