New inflation data shows an intact, but bumpy cooldown

Consumer price data released Thursday showed Federal Reserve, White House and U.S. household officials that inflation continued to slow through late 2023, capping a year that saw a severe cooling of price increases that have bedeviled families and policymakers .

Overall, prices rose faster in December than in November on an annual basis: 3.4 percent versus 3.1 percent previously, which was more than economists had forecast in a Bloomberg survey.

But after excluding volatile food and fuel prices to get a sense of the underlying inflation trend, a ‘core’ price measure rose 3.9 percent over the year to December, down from from the 4 percent previously. That was the first time since May 2021 that the core index fell below 4 percent.

The data highlights that while inflation remains faster than normal — and monthly increases are still likely as gas prices and other volatile costs fluctuate — the measure is making progress toward a normal pace again. That will likely come as welcome news to central bankers and President Biden, after nearly three years of rapid price increases that have driven up costs for consumers and strained the budgets of many households.

“We’ve seen how lumpy the data can be,” said Gregory Daco, chief economist at EY-Parthenon. “The important dynamics are really at the core level, and what we see at the core level over a three or even six month period is really encouraging.”

Some underlying details may keep Fed officials wary as they look ahead to 2024. A slowdown in rents for new leases is only gradually filtering through to the broader housing market. And while some goods and service costs are cooling significantly, price tags for products like auto insurance continue to rise quite sharply.

But many economists expect inflation to continue to moderate in the coming months as an expected slowdown in price increases materializes and as the overall economy returns to a more normal pattern.

Whether that happens will determine what comes next from policymakers at the Fed.

Fed officials have raised rates significantly to slow economic growth and try to get inflation under control: Their key policy rate now stands at 5.25 to 5.5 percent, up from near zero in early 2022. But With inflation cooling, central bankers could start cutting rates to more normal levels this year.

Their job now is to balance two goals. On the one hand, they want to ensure that inflation is completely under control. On the other hand, they don’t want to keep borrowing costs too high for too long, threatening a recession that would cost jobs and increase unemployment.

Policymakers have indicated they could cut rates three times by 2024. They are not yet ready to completely rule out the possibility of another rate hike before reversing course, but investors and many economists think their next step will be to cut rates – perhaps as soon as March.

For the Fed, Thursday’s report was a reminder to proceed cautiously, said Oscar Munoz, chief U.S. macro strategist at TD Securities. He expects central bankers to wait until May to cut borrowing costs, giving them more time to see that inflation has actually been defeated.

“They need to be a little more patient,” Mr. Munoz said.

Fed officials themselves have pushed back expectations for upcoming rate cuts in recent weeks.

“If we don’t keep financial conditions tight enough, there is a risk that inflation will pick up again and reverse the progress we have made,” said Lorie Logan, the president of the Federal Reserve Bank of Dallas. in a speech on January 6.

For consumers, slowing inflation means that prices for many everyday purchases – from goods like furniture to services like rent – ​​are no longer rising as much. Some products are even dropping in price, although for the most part price levels are still higher than they were a few years ago.

Wages are rising at a strong pace, which should help consumers catch up. The average hourly wage was climb faster than the total consumer price index since last summer, on an annual basis. Since February 2020, both consumer prices and average hourly wages have increased by approximately the same amount.

As consumers gain ground, they also become a little more optimistic. Multiple measures of consumer confidence have shown improvements recently, and although the share of households who say their financial situation is worsening has increased from 2019, but has fallen in recent months.

And in the White House, the moderation in inflation – and improving sentiment among Americans – is a welcome development.

“We ended 2023 with inflation down nearly two-thirds from its peak,” Biden said in a statement after the release. “Despite what many forecasters predicted a year ago, inflation has fallen, while growth and the labor market have remained strong.”

Economists will now keep an eye on the release of the Personal Consumption Expenditures index, which is what the Fed is officially referring to when it says it aims for annual inflation of 2 percent. The measure takes some data from the consumer price index, but is released with more delay and is planned publication on January 26.

Omair Sharif, founder of Inflation Insights, said that because of the way the data is calculated, the continued cooling is likely to be especially pronounced in the Fed’s preferred measure.

And on the consumer price index, he expects house prices to cool in the coming months – an important step in further reducing inflation.

“I think we are on the cusp” of the long-awaited reduction in shelter costs, he said, noting that a measure to track housing rents fell in December. “Were very close.”