Inflation slowing, but rate hike still expected
Inflation slowed more sharply than expected in November, an encouraging sign for both Federal Reserve officials and consumers that 18 months of rapid and unrelenting price increases are beginning to meaningfully abate.
The new data is unlikely to alter the Fed’s plan to raise interest rates by another half-point at the conclusion of its two-day meeting Wednesday.
But the moderation in inflation, which affected used cars, some types of food and airline tickets, caused investors to speculate that the Fed could pursue a less aggressive policy path next year — potentially increasing the chances of a “soft landing,” or one in which the economy slows gradually and without a painful recession.
Stock prices jumped sharply after government data showed that inflation eased to 7.1 percent in the year through November, down from 7.7 percent in the previous reading and less than economists had expected.
The Fed, which has been rapidly raising rates in three-quarter point increments, is expected to make a smaller move on Wednesday, bringing rates to a range of 4.25 percent and 4.5 percent. Central bankers will also release economic projections showing how much they expect to raise interest rates next year, and investors are now betting that they will slow to quarter-point adjustments by their February meeting as fading price pressures give them latitude to proceed more cautiously.
“The overall picture is definitely improving,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “It’s unambiguously good news, but it would not be fair to say that inflation is falling everywhere — there are still pockets of big increases.”
While price increases are not yet slowing across the board, they are moderating for key goods and services that consumers buy every day, including gas and meat. That is good news for President Joe Biden, who has struggled to convince Americans that the economy is strong as the surging cost of living erodes voter confidence.
“Inflation is coming down in America,” Biden said during remarks at the White House on Tuesday morning. He hailed the report as “news that provides some optimism for the holiday season, and I would argue, the year ahead.”
Still, he cautioned that the nation could face more setbacks in its efforts to bring inflation under control. “We shouldn’t take anything for granted,” he said.
Inflation remains unusually rapid for now: Tuesday’s 7.1 percent reading is an improvement, but it is still much faster than the roughly 2 percent that prevailed before the pandemic.
The details of the report suggested that further cooling is likely in store.
Many of the categories in which price increases are now slowing are tied more to the pandemic and supply chains than to Fed policy. For instance, food and fuel price jumps are moderating after climbing rapidly earlier this year, an effect of transportation issues and fallout from the war in Ukraine. Used car prices, which were severely elevated by a collision of consumer demand and parts shortages, are now falling sharply.
Officials are “getting the help that they expected” from healing supply chains and cheaper goods, said Michael Gapen, chief U.S. economist at Bank of America.