Inflation remains roughly stable ahead of the Fed Meeting

Inflation data released Tuesday showed price increases remained subdued in November, the latest sign that inflation has cooled significantly from its June 2022 peak. That will likely keep the Federal Reserve on course to keep rates unchanged during the last meeting of the year, which takes place this week.

The consumer price index came as the Fed began its two-day meeting, which will end Wednesday at 2 p.m. with the release of an interest rate decision and a new set of quarterly economic forecasts. Jerome H. Powell, the chairman of the Fed, will then hold a press conference.

Central bankers have embraced a recent slowdown in price increases, with Tuesday’s data largely showing inflation remains lower than earlier this year. Total inflation rose by 0.1 percent on a monthly basis, which amounts to an increase of 3.1 percent compared to a year earlier.

That was cooler than the 3.2 percent in October, and significantly lower than a peak above 9 percent in the summer of 2022.

But some underlying details of the report may keep Fed officials on edge as they consider what to do next with rates. Investors expect central bankers to start cutting borrowing costs in the first half of 2024, although officials have tried to keep their options open.

After removing volatile food and fuel to get a clearer picture of underlying inflation trends, so-called core inflation rose faster on a monthly basis. And a closely watched metric that tracks housing costs also rose faster; this measure is called “owner equivalent rent” because it estimates how much it would cost someone to rent a home he or she owns, and economists had expected it to fall.

“It reinforces the idea that it will be a bumpy road to disinflation,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “The Fed cannot cut rates too quickly in the face of resilient services inflation.”

Core inflation was 4 percent higher than a year earlier and remained stable compared to October. That pace remains well above the pace of about 2 percent that was normal before the outbreak of the pandemic.

Many economists expect inflation to fall further in 2024.

That is partly a function of monetary policy. Fed officials have raised rates sharply between March 2022 and this summer in an effort to slow the economy, hoping to cool demand enough to bring inflation down. As it has become more expensive to borrow to make major purchases, the housing market has cooled somewhat and the car market has calmed down.

Policymakers have also received help from the supply side of the economy. Shipping lanes became clogged during the pandemic but have since cleared and factories have caught up with demand, easing shortages of some key products. The return to normal has contributed to commodity prices falling in recent months.

And as workers return to the labor market and fill open positions, wage increases are cooling – which could indicate that labor-intensive service sectors will stop raising prices.

Fed officials have held borrowing costs steady for several months now as they try to assess whether they have adjusted policy enough to return price increases to a normal pace over time.

“They should be very encouraged,” said Neil Dutta, head of economic research at Renaissance Macro, following the report. “Inflation is falling much faster than they expected, and the new figure doesn’t really change that.”

Still, central bankers are reluctant to declare victory at a time when inflation is improving but still high. Economists expect to maintain this cautious approach this week, even as many think the Fed’s next move will be a rate cut.

“It would be premature to conclude with confidence that we have reached a sufficiently restrictive position, or to speculate about when policy might ease,” Mr. Powell said at a recent speech.

Investors believe that financing costs could fall as early as the first half of 2024 market expectationsalthough continued economic momentum or persistent prices could slow that down.

Ms. Uruci said the persistence of housing costs in Tuesday’s report likely “pushes any expected cuts to later in the year.” Policymakers will not want to change course at a time when price increases may remain at a still high pace.

Inflation has repeatedly surprised forecasters since 2021 by cooling down and then resurging, making it now a challenge to predict how quickly it will subside.

“It’s hard to have confidence after the last few years,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives.