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Fresh Inflation Data Shows Intact, but Bumpy, Cool-Down

Consumer price data released Thursday showed Federal Reserve officials, the White House and American households that inflation continued to slow at the end of 2023, capping a year in which the price increases bedeviling families and policymakers cooled in earnest.

Prices overall climbed more quickly in December than November on a yearly basis: 3.4 percent versus 3.1 percent previously, which was more than economists in a Bloomberg survey had forecast.

But after stripping out volatile food and fuel prices to get a sense of the underlying inflation trend, a “core” price measure climbed 3.9 percent in the year through December, down from 4 percent previously. That marked the first time the core index has dropped below 4 percent since May of 2021.

The data underscores that while inflation remains faster than usual — and month-to-month bumps are still likely as gas prices and other volatile costs fluctuate — the measure is making progress back toward a normal pace. That is likely to come as welcome news to central bankers and President Biden after nearly three years of rapid price increases that have pushed up costs for consumers and strained many household budgets.

“We’ve seen how the data can be bumpy,” said Gregory Daco, chief economist at EY-Parthenon. “The important dynamic is really at the core level, and what we’re seeing at the core level on a three or even six-month basis is really encouraging.”

Some of the underlying details could keep Fed officials wary as they look ahead to 2024. A slowdown in rent for new leases is trickling through the broader housing market only gradually. And while some goods and service costs are cooling notably, price tags on products like vehicle insurance continue to increase fairly steeply.

But many economists do expect inflation to continue to moderate in the months ahead as an expected cool-down in shelter price increases materializes and as the economy overall settles back into a more normal pattern.

Whether that happens will shape what comes next from policymakers at the Fed.

Fed officials have raised rates considerably to slow economic growth and try to wrestle inflation under control: Their main policy rate now stands at 5.25 to 5.5 percent, up from near-zero as recently as early 2022. But with inflation cooling, central bankers could begin to lower interest rates to more normal levels this year.

Their task now is to balance two goals. On one hand, they want to make sure that inflation is coming fully under control. On the other, they do not want to keep borrowing costs too high for too long, risking a recession that would cost jobs and push up unemployment.

Policymakers have signaled that they could cut interest rates three times in 2024. They are not yet willing to fully rule out the possibility of another rate increase before they reverse course, but investors and many economists think that their next move will be to reduce rates — perhaps as soon as March.

For the Fed, Thursday’s report was a reminder to tread carefully, said Oscar Munoz, chief U.S. macro strategist at TD Securities. He expects central bankers to wait until May to lower borrowing costs, giving themselves more time to see that inflation is truly vanquished.

“They need to be a little more patient,” Mr. Munoz said.

Fed officials themselves have pushed back in recent weeks on expectations for imminent rate cuts.

“If we don’t maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we’ve made,” Lorie Logan, the president of the Federal Reserve Bank of Dallas, said in a speech on Jan. 6.

For consumers, slowing inflation means that prices for many everyday purchases — from goods like furniture to services like rent — are no longer climbing as sharply. Some products are actually coming down in price, though for the most part, price levels remain higher than they were a few years ago.

Wages are picking up at a solid pace, which should help consumers to catch up. Average hourly earnings have been climbing faster than the overall Consumer Price Index since last summer, on a yearly basis. In fact, since February 2020, consumer prices and average hourly earnings are both up by roughly the same amount.

As consumers gain ground, they are also becoming slightly more optimistic. Several measures of consumer confidence have shown improvements recently, and while the share of households that say their financial situation is worsening has climbed relative to 2019, it has come down in recent months.

And at the White House, the moderation in inflation — and the improving sentiment among Americans — is a welcome development.

“We ended 2023 with inflation down nearly two-thirds from its peak,” Mr. Biden said in a statement following the release. “Despite what many forecasters were predicting a year ago, inflation is down while growth and the job market have remained strong.”

Economists will now be watching the release of the Personal Consumption Expenditures index, which the Fed officially targets when it says it is aiming for 2 percent annual inflation. The measure pulls some data from the Consumer Price Index but is released at more of a delay, and is set for publication on Jan. 26.

Omair Sharif, founder of Inflation Insights, said that because of the way the data are calculated, the continued cool-down is likely to be especially pronounced in that Fed preferred measure.

And in the Consumer Price Index, he does expect housing prices to cool in the months ahead — a key step in wrestling inflation the rest of the way down.

“I think we’re on the cusp” of the long-awaited shelter cost moderation, he said, noting that a measure tracing residential rent did tick down in December. “We’re very close.”

Sumber: www.nytimes.com