In an unexpected twist, the Federal Reserve’s closely-watched inflation measure barely budged last month, suggesting some relief after months of steep price hikes.
The Commerce Department’s latest report shows a modest 0.1% rise in prices from October to November, a welcome change from prior months of significant increases. Excluding the unpredictable categories of food and energy, prices also saw a minimal bump of 0.1%. This easing of inflation comes on the heels of an announcement by Fed Chair Jerome Powell that the Federal Reserve envisions fewer interest rate cuts in 2025 than previously anticipated.
Powell remarked that the persistence of inflation has been a major consideration in revising the interest rate outlook. Fewer rate cuts mean consumers might face continued high mortgage rates and borrowing costs. Nevertheless, the data reveals a slight uptick in year-over-year inflation, moving from 2.3% in October to 2.4% in November, hovering above the Fed’s 2% target.
Despite this, the “core” prices, which strip out food and energy costs, have maintained a steady 2.8% year-over-year rate, a metric the Fed regards as a more reliable predictor of inflation’s trajectory. Analysts suggest the cooled monthly figures may have influenced the Fed’s recent decision to lower its key interest rate, yet this preference for the personal consumption expenditures (PCE) price index over the consumer price index (CPI) is telling.
The report also indicates consumer spending surged by 0.4% from October to November, evidencing a robust economic engine led by household consumption. “We can break for the holidays with comfort that the economy’s growth engine is humming along,” economist Oren Klachkin noted, pointing to strong consumer demand.
The Fed’s cautious stance comes as it observes steady inflation, aiming to lower rates without rushing the process. Powell emphasized patience, stating, “Our position shouldn’t change based on two or three points of good or bad data.” The inflation measure, which has dropped dramatically from a 7.2% peak in June 2022 to 2.1% in September, reflects the Fed’s efforts to manage the economy through precise rate adjustments.
Current forecasts by Fed policymakers suggest a slight inflation increase to 2.5% by the end of 2025, although they foresee core prices dipping to the same rate. Powell stressed the importance of significant progress before any further interest rate reductions.
The PCE index remains a favored tool among Fed officials due to its ability to capture consumers’ behavior shifts, such as opting for cheaper brands during inflation spikes. Unlike the CPI, the PCE tends to show a slightly lower inflation rate as it accounts differently for housing costs, which have significantly impacted the CPI.
While inflation has shown promising signs of cooling, the Federal Reserve’s careful approach underlines the complexities in achieving sustainable economic growth. As the Fed continues to navigate inflation with targeted rate cuts, consumers and markets alike watch closely, poised for any shifts that could impact financial stability.
Source: Apnews
