The Fed’s favorite inflation gauge eased in November
a closely watched inflation measure Yields cooled notably in November, which is good news for the Federal Reserve as officials move to the next phase in their fight against rapid price increases, and positive news for the White House as voters face less daunting cost increases .
The inflation measure for personal consumption expenditure, which the Fed cites when it says it aims for an average inflation rate of 2 percent over time, rose 2.6 percent over the year through November. That was down from 2.9 percent the month before, and less than what economists had predicted. Compared to the previous month, prices have even fallen slightly.
After taking out volatile food and fuel prices to get a clearer picture of underlying price pressures, inflation rose 3.2 percent over the year. That was lower than before (3.4 percent).
The report provided the latest evidence that price increases are slowing rapidly, after several months of progress that helped convince policymakers that they may be in sight of a soft economic landing — one in which inflation moderates without a painful recession. Fed policymakers kept rates steady at their meeting this month, signaling they may be done raising rates and suggesting they could cut borrowing costs as much as three times next year.
“Inflation has fallen from its all-time highs, and this has happened without a significant increase in unemployment – which is very good news,” Federal Reserve Chairman Jerome H. Powell said at the meeting. Still, he emphasized that “the path forward is uncertain.”
The report released Friday also showed that consumers are still spending at moderate levels. A measure of personal consumption rose 0.2 percent from October, and 0.3 percent after adjusting for inflation. Both measurements were faster than the previous month.
The Fed is expected to start lowering interest rates as early as March, based on market prices, although officials have argued that it is still too early to talk about when interest rate cuts will start.
Central bankers are likely to watch closely for signs that inflation has eased further, while wondering when borrowing costs might fall. Some officials have suggested that keeping interest rates steady when price increases slow would actually put more pressure on the economy (interest rates are not price-adjusted, so they move higher after inflation is eliminated as inflation falls).
Policymakers will also likely keep a close eye on consumer spending as they try to figure out how much momentum is left in the economy. Officials still expect the economy to slow significantly in 2024, a cooling in demand that they say would pave the way for sustainably slower price increases.
After a year in which inflation cooled quickly despite surprisingly strong growth, economists are showing humility. But policymakers remain wary of a situation where growth remains too strong.
“If you have robust growth, that probably means we’re going to keep the labor market very strong; it will likely put some upward pressure on inflation,” Mr. Powell said in his speech news conference. “That could mean it will take longer to reach 2 percent inflation.”
That, he said, “could mean we have to keep interest rates high for longer.”