The Federal Reserve’s preferred inflation gauge cooled further last month even as the economy kept growing briskly, a trend sure to be welcomed at the White House as President Joe Biden seeks re-election in a race that could pivot on his economic stewardship.
Quick Read
- Fed’s Inflation Gauge Shows Cooling: The Federal Reserve’s preferred measure of inflation indicated a further cooling last month, aligning with robust economic growth.
- December Price Rise Minimal: Prices in December rose only 0.2% from November, closely aligning with pre-pandemic levels and slightly above the Fed’s 2% annual target.
- Year-over-Year Increase Steady: Prices increased by 2.6% compared to the previous year, maintaining the same rate as in the preceding month.
- Core Prices Also Subdued: Excluding food and energy, core prices rose just 0.2% month-to-month, with a year-over-year increase of 2.9% in December, the lowest since March 2021.
- Strong Economic Growth in 2023: Contrary to recession expectations, the economy grew by 2.5% in 2023, bolstered by solid consumer spending.
- Political Implications for Biden: The cooling inflation and strong economic growth could positively impact President Biden’s re-election campaign, focusing on economic stewardship.
- Consumer Confidence Improving: Measures like the University of Michigan’s consumer confidence index show increasing optimism about the economy.
- Prospect of a “Soft Landing”: The data suggests the economy is achieving a balance of reducing inflation without triggering a recession, possibly leading to Fed rate cuts.
- Fed’s Rate Hike Strategy: The Fed’s aggressive rate hikes since March 2022, raising the benchmark rate to around 5.4%, have been credited with slowing inflation.
- Rate Cut Speculations: Despite market expectations, Fed officials are cautious about rushing into rate cuts, with no clear indication of timing.
- Comparison with CPI Data: The Fed’s inflation measure shows a lower inflation level than the consumer price index, which reported 3.4% inflation in December.
- Factors Behind Inflation Decline: The decline in inflation is attributed to the recovery of global supply chains, increased labor market participation, and slower wage growth.
The Associated Press has the story:
US Inflation slowed in December as economic ‘soft landing’ moves into sharper focus
Newslooks- WASHINGTON (AP) —
The Federal Reserve’s preferred inflation gauge cooled further last month even as the economy kept growing briskly, a trend sure to be welcomed at the White House as President Joe Biden seeks re-election in a race that could pivot on his economic stewardship.
Friday’s government report showed that prices rose just 0.2% from November to December, a pace broadly consistent with pre-pandemic levels and barely above the Fed’s 2% annual target. Compared with a year ago, prices increased 2.6%, the same as in the previous month.
Excluding volatile food and energy costs, prices also rose just 0.2% from month to month. And compared with a year earlier, so-called “core” prices climbed 2.9% in December — the smallest such increase since March 2021. Economists consider core prices a better gauge of the likely path of inflation.
Friday’s mild inflation data arrived a day after government figures showed that the economy expanded at a surprisingly strong 3.3% annual pace in the final three months of last year. Solid consumer spending propelled the growth, capping a year that had begun with widespread expectations of a recession. Instead, the economy grew 2.5% in 2023, up from 1.9% in 2022.
Biden’s Republican critics have sought to highlight what had been the biggest inflation spike in 40 years, for which they have largely blamed the president’s spending policies. But with inflation having dropped sharply after an extended period of gloomy consumer sentiment, Americans are starting to show signs of feeling better about the economy. A measure of consumer confidence by the University of Michigan, for example, has jumped in the past two months by the most since 1991.
The latest data suggests that the economy is achieving a difficult “soft landing,” in which inflation falls back to the Fed’s 2% target without a recession. That outcome could make it easier for the Fed to consider cutting its key interest rate, which it raised 11 times since March 2022 to attack inflation. Higher interest rates have throttled home and auto sales by raising the cost of borrowing. Businesses have also chafed under the higher interest rates.
In December, the Fed’s policymakers projected that they would carry out three quarter-point rate cuts this year. Yet they provided little hint of when the first cut might occur. Late last year, Wall Street traders had bet that the first rate cut would occur in March.
Several Fed officials, though, have pushed back against such assumptions. Christopher Waller, an influential figure on the Fed’s Board of Governors, last week reiterated his view that inflation is on track to return to the Fed’s 2% goal. But Waller cautioned that any decision to cut rates should be “carefully calibrated and not rushed” — remarks that were widely interpreted as downgrading the likelihood of a March cut.
Many economists credit the Fed’s sharp rate hikes — which boosted its benchmark rate from near zero to about 5.4% after the most recent hike in July — with cooling demand and helping slow inflation. Rate cuts by the Fed, conversely, would eventually lead to lower borrowing costs for consumers and businesses.
Friday’s price data showed a lower level of inflation than did the most recent consumer price index, released earlier this month, which showed inflation at 3.4% in December. The more widely known CPI shows higher inflation than the Fed’s preferred measure partly because it puts greater weight on housing and rents, whose prices are higher than for many other goods and services.
During 2023, inflation fell steadily as global supply chains recovered from pandemic-era disruptions and more Americans came off the sidelines to take jobs, which helped slow wage growth. Slower-rising pay eases the pressure on businesses to raise prices to offset higher labor costs. According to the Fed’s preferred measure, inflation peaked at 7.1% in June 2022.
