Inflation remains broadly stable ahead of Federal Reserve meeting

Inflation remains broadly stable ahead of Federal Reserve meeting

Inflation data released on Tuesday showed that price increases remained moderate in November, the latest sign that inflation has cooled substantially from its June 2022 peak. That is likely to keep the Federal Reserve on track to leave interest rates unchanged at their last meeting of the year, which will take place this week.

The Consumer Price Index was released just as the Federal Reserve began its two-day meeting, which will conclude with the release of an interest rate decision and a new set of quarterly economic projections at 2 p.m. Wednesday. Jerome H. Powell, chairman of the Federal Reserve, is then scheduled to hold a news conference.

Central bankers have welcomed a recent slowdown in price increases, and Tuesday’s data largely suggested that inflation remains lower than earlier this year. Headline inflation increased by 0.1 percent monthly, representing an increase of 3.1 percent compared to the previous year.

That was down from 3.2 percent in October, and is notably below the peak of over 9 percent in the summer of 2022.

But some of the underlying details of the report could keep Fed officials cautious as they contemplate what to do next with interest rates. Investors expect central bankers to begin reducing borrowing costs in the first half of 2024, although officials have been trying to keep their options open.

After excluding volatile food and fuel to give a clearer picture of underlying inflation trends, so-called core inflation rose more rapidly on a monthly basis. And a widely followed measure that tracks housing expenses also rose more quickly; That measure is called “owner equivalent rent” because it estimates how much it would cost someone to rent a home they own, and economists expected it to decline.

“It 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 utility inflation.”

Core inflation rose 4 percent compared to a year earlier, remaining stable since October. That pace remains well above the roughly 2 percent pace that was normal before the pandemic began.

Many economists expect inflation to continue falling in 2024.

That’s partly a function of monetary policy. Fed officials sharply raised rates between March 2022 and this summer in an attempt to slow the economy, hoping to cool demand enough to reduce inflation. As it has become more expensive to borrow to make large purchases, the housing market has cooled a bit and the car market has calmed down.

Authorities have also received help from the supply side of the economy. Shipping routes were clogged during the pandemic, but have since cleared, and factories have regained demand, easing shortages of some key products. The return to normality has helped lower prices of goods in recent months.

And as workers return to the labor market, filling vacant positions, wage increases have been cooling, which could suggest that labor-intensive service industries will stop raising prices as quickly.

Federal Reserve officials have held borrowing costs steady for several months as they try to assess whether they have tightened policy enough to bring price increases back to a normal pace over time.

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

Still, central bankers have been hesitant to claim victory at a time when inflation is improving but remains high. Economists expect them to maintain that cautious approach this week, although many think the Federal Reserve’s next move will be an interest rate cut.

“It would be premature to confidently conclude that we have achieved a sufficiently restrictive stance, or to speculate on when the policy might be eased,” Powell said during a recent speech.

Investors believe borrowing costs could decline as early as the first half of 2024, according to market expectationsalthough continued economic momentum or persistent prices could delay this.

Uruci said the tightness of housing costs in Tuesday’s report likely “drives any cuts expected later in the year.” Authorities will not want to reverse course at a time when price increases could remain stuck at a still high pace.

Inflation has surprised forecasters repeatedly since 2021 by cooling only to rise again, making predicting how quickly it will disappear now a challenge.

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

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John C. Johnson

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