A closely watched measure of inflation cooled dramatically in November, good news for the Federal Reserve as officials move to the next stage in their fight against rapidly rising prices and positive for the White House as voters see relief from rising interest rates. cost.
The Personal Consumption Expenditures inflation measure, which the Fed cited when it said it aimed for 2 percent inflation on average over time, rose 2.6 percent in the year to November. That was down from 2.9 percent the previous month, and lower than economists had predicted. Compared to the previous month, prices generally fell slightly for the first time in years.
That decline – a 0.1 percent decline, and the first negative reading since April 2020 – came as gas prices come down After stripping out volatile food and fuel prices for a clearer view of underlying price pressures, inflation rose modestly on a monthly basis and 3.2 percent over the year. That’s down from 3.4 percent previously.
While that was still faster than the Fed’s goal, the report provided the latest evidence that price increases are quickly slowing back toward the central bank’s target. After more than two years of rapid inflation that has weighed on American consumers and confused policymakers, several months of steady growth have helped to convince policymakers that they may be turning a corner.
Increasingly, officials and economists think they may be seeing a soft landing in the economy — one in which inflation returns to normal without a painful recession. Fed policymakers kept interest rates steady at their meeting this month, hinted they may be done raising interest rates and suggested they could cut borrowing costs three times next year. .
“Inflation has slowed faster than the Fed expected – which could allow them to potentially reduce sooner, and more aggressively,” said Gennadiy Goldberg, head of US rates strategy at TD Securities. “They’re really trying their best to deliver a soft landing here.”
The improvement in inflation is welcome news for the Biden administration, which is struggling to capitalize on strong economic growth and low unemployment at a time when high prices are eroding household confidence.
President Biden issued a statement in celebration of the report, and Lael Brainard, director of the National Economic Council, called the slowdown in inflation “a significant milestone” in a call with reporters.
“Inflation has come down faster than the more optimistic forecasts,” he said, noting that wage gains have outpaced price increases. Although he did not directly comment on monetary policy, citing the central bank’s independence from the White House, he noted that households are already facing lower mortgage rates while investors expect a more relaxed that Fed.
Based on market pricing, the Fed is expected to start lowering interest rates as soon as March, although official argued that it is too early to talk about when the rate cut will start.
“Inflation has eased from its peak, and it’s come without a significant increase in unemployment — that’s very good news,” Jerome H. Powell, the Fed chair, said at that meeting. However, he emphasized that “the path forward is uncertain.”
Central bankers are likely to keep a close eye on signs that inflation continues to cool as they consider when to start cutting rates. Some officials have suggested that keeping borrowing costs steady when inflation slows would further squeeze the economy. (Interest rates are not price-adjusted, so they rise after removing inflation while inflation falls.)
However, Fed officials are hesitant to declare victory after repeated headwinds in which rate hikes have proved more stubborn than expected, and at a time when geopolitical issue could complicate supply chains or push up gas prices.
“The more favorable inflation data is certainly something to celebrate, but there is some turbulence ahead,” wrote Omair Sharif, founder of Inflation Insights, in a note responding to Friday’s data. “Fed officials want to get through before turning focus to cutting rates.”
Policymakers are likely to keep a close eye on consumer spending as they try to figure out how much momentum is left in the economy.
The report issued Friday showed that consumers are still spending at a moderate clip. A measure of personal consumption rose 0.2 percent from October, and 0.3 percent after adjusting for inflation. Both readings were faster than last month. That suggested growth was still positive, although not as hot as earlier this year.
Officials still expect the economy to slow further in 2024, a cool-down in demand that they believe will give way to continued slower price increases.
After a year in which inflation cooled rapidly despite surprisingly strong growth, economists are expressing humility. But policymakers remain wary of a situation where growth remains too strong.
“If you have growth that’s stable, that means we’re probably going to keep the labor market very strong; it will probably put some upward pressure on inflation,” Mr. Powell said in his news conference. “That could mean it takes longer to get to 2 percent inflation.”
That, he said, “could mean we have to keep rates higher for longer.”
