Inflation remains roughly flat ahead of Fed meeting

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 is likely to keep the Fed on track to leave interest rates unchanged at its final meeting of the year. , which will be held this week.

The CPI was released just hours before the Federal Reserve begins its two-day meeting, which will conclude with the release of its interest rate decision and a new set of quarterly economic forecasts at 2 p.m. on Wednesday. Federal Reserve Chairman Jerome Powell is then scheduled to hold a press conference.

Central bankers have embraced the recent slowdown in price increases, and Tuesday’s data largely suggests that inflation remains lower than it was earlier this year. Overall inflation rose by 0.1% on a monthly basis, representing a 3.1% increase compared to the previous year.

That was down from 3.2 percent in October, and significantly lower than the peak of more than 9 percent in the summer of 2022.

But some key details of the report could make Fed officials cautious as they consider what to do next with interest rates. Investors expect central bankers to start cutting borrowing costs during the first half of 2024, although officials are trying to keep their options open.

After excluding volatile food and fuel items to give a clearer idea of ​​underlying inflation trends, so-called core inflation rose more quickly on a monthly basis. A closely watched index that tracks housing expenditures also rose more quickly. This measure is called the “equivalent rent for owners” because it estimates how much it would cost someone to rent a home they own, and economists had expected it to fall.

“It reinforces the idea that there will be a bumpy road to fighting inflation,” said Blerina Orochi, chief US economist at T. Rowe Price. “The Fed cannot cut interest rates too early in the face of resilient services inflation.”

Core inflation rose by 4 percent compared to the previous year and has remained steady since October. This pace is still much higher than the roughly 2 percent pace that was normal before the pandemic.

Many economists expect inflation to continue to decline in 2024.

This is part of the function of monetary policy. Fed officials raised interest rates sharply between March 2022 and this summer in an attempt to slow the economy, hoping to cool demand enough to reduce inflation. As the cost of borrowing to make large purchases rose, the housing market calmed somewhat and the car market cooled.

Policymakers have also received help from the supply side of the economy. Shipping routes were clogged during the pandemic but have since been empty, and factories have responded to demand, alleviating shortages of some key products. The return to normal has helped push commodity prices lower in recent months.

As workers return to the labor market, to fill vacant jobs, wage gains have slowed – which may indicate that labor-intensive service industries will stop raising prices as quickly.

Fed officials have now held borrowing costs steady for several months in an attempt to assess whether they have adjusted policy enough to return rate increases to a normal pace over time.

“They should be strongly encouraged,” Neil Dutta, head of economic research at Renaissance Macro, said following the report. “Inflation is falling much more quickly than they expected, and the new number doesn’t really change that.”

However, central bankers have been reluctant to declare victory at a time when inflation is improving but remains high. Economists are expected to maintain this cautious approach this week, although many believe the Fed’s next move will be to cut interest rates.

“It would be too early to confidently conclude that we have achieved a sufficiently restrictive stance, or to predict when the policy will be eased,” Powell said. Speech recently.

Investors believe that borrowing costs could fall as soon as the first half of 2024, accordingly Market forecastAlthough continued economic momentum or stubborn prices could delay this.

Ms. Orochi said the flatness in housing costs in Tuesday’s report would likely “push any expected cuts to later in the year.” Policymakers will not want to reverse course at a moment when price increases may falter at a still-high rate.

Inflation has repeatedly surprised forecasters since 2021 when it fell and then rose again, making it a challenge to predict how quickly it will fade now.

“It’s hard to be confident after the last few years,” said Laura Rosner Warburton, chief economist at MacroPolicy Perspectives.