Inflation cooling, hopes rising
Rate falls more than expected, easing pressure on Federal Reserve on eve of meeting
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 are unlikely to alter the Fed’s plan to raise interest rates by another half point at the conclusion of its two-day meeting on Wednesday. But the moderation in price increases, which affected used cars, food, and airline tickets, caused investors to speculate that the Fed could pursue a less aggressive path next year — potentially increasing the chances of a “soft landing,” or one in which the economy slows gradually without a painful recession.
Stock prices initially jumped sharply higher after government data showed that inflation eased to 7.1 percent in the year through November, dropping 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 between 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 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 increases are not yet slowing across the board, prices are moderating for key goods and services that consumers buy every day, including gas and meat. That is good news for President 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, inflation remains unusually rapid: 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 prices 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 US economist at Bank of America.
The question now is what will happen with inflation in service categories, which can be more difficult to cool. The Fed has lifted interest rates from just above zero early this year to about 4 percent — and those higher borrowing costs are now trickling through the economy to cool both consumer demand and the labor market. That should slow down many types of inflation in 2023.
Already, market-based rent increases have pulled back sharply, which should trickle into inflation data over the next year.
Rents were 7.9 percent higher than a year earlier in November, the fastest year-over-year increase in four decades, as tenants renew their leases after a big pop in market rent prices in 2021 and early 2022. That is poised to slow down notably in the coming months.
The consumer price index figures released on Tuesday are closely watched because they are the first major inflation data points to come out each month. The Fed officially targets a more delayed measure, the Personal Consumption Expenditures index, and aims for 2 percent on average over time. That measure came in at 6 percent in the year through October.
If price increases remained stubbornly higher for years on end, they could begin to feed on themselves, with consumers asking for bigger raises to keep up and companies instituting bigger or more frequent price adjustments to cover rising labor bills. That sort of self-fulfilling cycle is exactly what the Fed is trying to avoid.