HAS 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, overall prices even fell slightly 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, indicated 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.”
“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. I nevertheless emphasized 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 stable when price rises slow would have the effect of further compressing the economy (interest rates are not price-adjusted, so they rise after deducting l inflation as inflation falls).
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 hot as it was earlier this year.
Officials still expect the economy to slow more sharply 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.”