The Federal Reserve’s favored inflation indicator continued to moderate last month, even as the economy maintained robust growth. This development is likely to be well-received at the White House, particularly as President Joe Biden gears up for re-election, with the economy playing a pivotal role in the electoral landscape.
The government report released on Friday revealed a mere 0.2% increase in prices from November to December, a rate consistent with pre-pandemic levels and only slightly above the Fed’s annual target of 2%. Over the year, prices rose by 2.6%.
Excluding volatile food and energy costs, the “core” prices saw a 0.2% increase from month to month and a 2.9% rise from a year earlier – the smallest increase since March 2021. Economists often consider core prices as a more accurate gauge of inflation trends.
In December, Inflation Decelerates as Focus Sharpens on Economic ‘Soft Landing’ (Credits: KRQE)
These latest figures suggest that the economy is achieving a challenging “soft landing,” where inflation retreats to the Fed’s target without triggering a recession.
Such an outcome could pave the way for the Fed to contemplate reducing its key interest rate, which it has raised 11 times since March 2022 to combat inflation. The heightened interest rates have impacted home and auto sales by increasing borrowing costs, leading to challenges for businesses.
A government report on Thursday highlighted a surprisingly robust 3.3% annual growth rate in the final quarter of the previous year, driven by strong consumer spending.
This performance marked a significant contrast to the earlier expectations of a looming recession at the beginning of the year. The economy expanded by 2.5% in 2023, up from 1.9% in 2022.
While Biden’s critics have previously emphasized a substantial inflation spike, the recent data indicates a notable decline in inflation, lifting consumer sentiment. The University of Michigan’s consumer confidence measure has witnessed the most significant increase in the past two months since 1991.
The details within Friday’s report underscore the control of inflation: Over the past six months, prices increased by just 1.9%, below the Fed’s 2% target. In the last three months, this figure dropped even lower to 1.5%. After nearly two years of sharp increases, grocery prices remained unchanged in December and were only 1.3% higher than a year earlier.
The report precedes the upcoming policy meeting of the Federal Reserve, where attention will be on Chair Jerome Powell’s news conference for any indications regarding potential interest rate cuts. The data presented on Friday is likely to be welcomed by the Fed, suggesting a trajectory in line with their inflation goals.
Consumers notably increased their spending in December, with a 0.7% rise from November, the most substantial gain since September. Incomes rose by 0.3%, although the real increase after adjusting for inflation was 0.1%.
The Fed’s policymakers had projected three quarter-point rate cuts for the year, but the timing of the first cut remains uncertain. While Wall Street traders had initially bet on a March cut, influential figures within the Fed, like Christopher Waller, have urged caution, emphasizing the need for a carefully calibrated and not rushed decision.
The Fed’s aggressive rate hikes, which raised the benchmark rate from near zero to approximately 5.4%, are credited with curbing demand and slowing inflation. Any potential rate cuts would eventually lead to reduced borrowing costs for consumers and businesses.
The price data released on Friday indicates a lower level of inflation compared to the recent consumer price index, which reported inflation at 3.4% in December. The disparity arises because the more widely known CPI places greater emphasis on housing and rents, which have higher prices compared to many other goods and services.
Throughout 2023, inflation steadily decreased as global supply chains recovered from pandemic disruptions, and more Americans rejoined the workforce, contributing to subdued wage growth. The Fed’s preferred measure indicates that inflation peaked at 7.1% in June 2022.
