Price Gains Slow More Than Expected

Inflation slowed more sharply than expected in November, an encouraging sign for Federal Reserve officials as they gather in Washington this week to discuss the next steps in their policy campaign against rapid price increases.

Fed policymakers are set to release their latest rate decision at 2 p.m. on Wednesday, at the conclusion of their two-day meeting. They are widely expected to raise interest rates by half a percentage point, slowing down after months of rapid three-quarter point moves. They will also release fresh economic projections.

Tuesday’s inflation figures are likely to figure into their discussion about the future policy path. The Consumer Price Index measure climbed 7.1 percent in November compared to a year earlier, less than the 7.3 percent that economists had expected and a slowdown from 7.7 percent in the previous reading. Between October and November, prices also picked up more slowly than forecast.

After stripping out food and fuel prices, which move around a lot, the index climbed by 6 percent. That was less than the 6.1 percent Bloomberg projection.

Overall inflation has been decelerating on year-over-year basis since hitting a peak in June, a sign that price increases are turning a corner after months of unexpected strength.

“Today’s report showed a fairly broad-based slowdown,” Omair Sharif, founder of Inflation Insights, wrote in a research note following the report.

Many economists had expected inflation to slow toward a more normal 2 percent pace this year. Instead, it has remained stubbornly rapid, fueled by rent increases, disruptions from the war in Ukraine, continued fallout from supply chain issues and climbing costs for services like airfares and car insurance. Analysts and policymakers alike are hoping that price increases will cool more markedly in 2023.

Fed policy should help that to happen. Central bankers have raised interest rates at the fastest pace in decades this year, moving them from near-zero earlier this year to an expected range of 4.25 to 4.5 percent as of this week. Higher borrowing costs are trickling through the economy, slowing down the housing market and making it more expensive to expand a business or buy a car on credit. That should eventually lead to less demand, more muted hiring and a general economic slowdown.

Weaker demand could combine with healing supply chains and a cooling rental housing market to take the pressure off prices, many economists predict. Economists in a Bloomberg survey expect C.P.I. inflation to come down to 3.1 percent by the final quarter of 2023, about half its current pace.

The Consumer Price Index figures released on Tuesday are closely watched because they are the first major inflation data to come out each month. But the Fed officially targets a more delayed measure, the Personal Consumption Expenditures index, when it sets its 2 percent inflation target.

That measure has been running below the Consumer Price Index rate but is also very elevated, coming in at 5 percent in the year through October after stripping out volatile food and fuel.

For the Fed, the key question going forward is not just whether inflation will slow, but how quickly and how completely it will come down. Central bankers worry that if price increases remain rapid for a long time, consumers could begin to expect that to continue. They might demand heftier wage increases in response, and if they win those raises, their employers may institute more regular and rapid price increases to cover climbing labor bills.

In short, expectations for fast inflation could help make that a reality.

While most measures of inflation expectations have remained fairly stable so far, policymakers do not want to assume that they will stay that way.

The fresh inflation data likely offered policymakers some signs for encouragement but also some reasons for continued concern. Inflation in food moderated and energy costs fell, which helped to pull inflation lower.

But food and energy costs aren’t the sort of inflation that the Fed watches closely, because they are volatile and typically do not closely reflect underlying strength in the economy.

There were other encouraging signs that some goods categories are beginning to drop in price. Used cars and trucks, for instance, were down 3.3 percent from a year earlier, and televisions are swiftly becoming cheaper. Such changes signal that supply-chain healing is finally benefiting consumers.

Under the surface, though, services inflation remains robust. Part of that comes from a rapid increase in rents that is expected to fade at some point in 2023. But some is from a tick-up in other categories, such as garbage collection, dentist visits and tickets to sports games.

Service price increases tend to be tied to rising wages and can be hard to stamp out. Service costs excluding energy are now contributing about 3.9 percentage points of overall inflation and could keep price increases rapid even as other types of inflation fade.

In the 1970s, officials allowed inflation to remain slightly more rapid than usual for years on end, which created what economists since have called an “inflationary psychology.” When oil prices spiked for geopolitical reasons, an already elevated inflation base and high inflation expectations helped price increases to climb into the stratosphere. Fed policymakers ultimately raised rates to nearly 20 percent and pushed unemployment to double digits to bring prices back under control.

Central bankers today want to avoid a rerun of that painful experience, which is why they are trying to promptly bring price increases to heel. For now, they have signaled that they expect to raise interest rates slightly in early 2023, then leave them at high levels to constrain the economy and attempt to squeeze out inflation.

“It is likely that restoring price stability will require holding policy at a restrictive level for some time,” Jerome H. Powell, the Fed chair, said during a speech late last month. “We will stay the course until the job is done.”