Price gains will be slower than expected

Inflation fell more sharply than expected in November, an encouraging sign for both Federal Reserve officials and consumers that 18 months of rapid and relentless price increases are starting to meaningfully slow.

The new data is unlikely to change the central bank’s plan to raise interest rates by another half point at the end of its two-day meeting on Wednesday. But rising prices, which have hit used cars, food and airline tickets, have led investors to speculate that the economy may pursue a less aggressive policy path next year — a “soft landing” or an increase in the likelihood. The economy slows down gradually and without a painful recession.

Stock prices rose sharply after government data showed inflation fell to 7.1 percent in the year to November, down from the previous reading of 7.7 percent and less than economists had expected.

The central bank, which has been rapidly raising rates in three-quarter point increments, is expected to make a smaller move on Wednesday, bringing rates to between 4.25 and 4.5 percent. Central bankers will also release economic forecasts showing how much they expect to raise interest rates next year, and investors are now betting they will slow quarter-point adjustments through their February meeting, as waning price pressures give them latitude to proceed with more caution.

“The overall picture is definitely improving,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “This is undoubtedly good news, but it would not be fair to say that inflation is falling everywhere – there are still pockets of large increases.”

While inflation hasn’t abated yet, prices for key goods and services that consumers buy every day, including gas and meat, have moderated. That’s good news for President Biden, who has struggled to convince Americans that the economy is strong as the rising cost of living erodes voter confidence.

“Inflation is slowing in America,” said Mr. Biden said during remarks at the White House on Tuesday morning. He hailed the report as “news that offers some hope for the holiday season and, I would argue, the coming year.”

However, he warned that the nation could face further setbacks in its efforts to bring inflation under control. “We shouldn’t take anything for granted,” he said.

Inflation is now unusually fast: Tuesday’s reading of 7.1 percent is an improvement, but it is much faster than the roughly 2 percent that prevailed before the pandemic.

Details of the report suggested further cooling may be in store.

Price hikes are now slowing down and are more linked across multiple categories Contagion and supply chains rather than central bank policy. For example, food and fuel prices have moderated after climbing sharply earlier this year, a result of transport problems and the war in Ukraine. Used car prices are now falling sharply, fueled by consumer demand and spare parts shortages.

Michael Capen, chief U.S. economist at Bank of America, said officials were “getting the support they expected” from supply chains and cheaper goods.

The question now is what will happen to inflation in service categories, which will be more stubborn and harder to cool down. The central bank has raised interest rates from above zero earlier this year to about 4 percent — and those higher borrowing costs are now trickling through the economy to cool both consumer demand and the labor market. It will reduce several types of inflation in 2023.

For example, because car loans are so expensive, used car prices are likely to continue to fall, driving buyers out of the market. Wage growth is now brisk, but is expected to slow as businesses hold back expansions or lay off workers, which will help lower prices for many types of services.

Already, market-based rent increases have pulled back sharply, which will trickle down in next year’s inflation data.

There was rent 7.9 percent higher The year-on-year increase was the fastest in four decades in November, as tenants renewed their leases after a big pop in market rents in 2021 and early 2022.

Consumer price index figures released on Tuesday are closely watched as they are the first major inflation points to come out each month. The central bank officially targets the most lagging measure, the personal consumption expenditures index, and aims to average 2 percent over time. That size came 6 percent Year to October.

As price increases begin to moderate significantly, investors and households are wondering how much more the central bank might raise interest rates in 2023 — and how long officials will keep raising borrowing costs.

At a time when inflation is already returning to normal, one camp argues that the central bank should be cautious, avoid doing too much and trigger a recession.

But other economists and policymakers argue that underlying inflationary pressures remain. They warn that the Fed should stick with the plan to ensure that inflation does not become a permanent feature of the US economy.

Inflation in services contributed 3.9 percentage points to the November inflation estimate. Much of that comes from the rapid increase in rent, which is poised to decline, but some is tick-up in other categories, such as trash collection, dentist visits and tickets to sports games.

“Although the long-awaited moderation in commodity types is finally underway, the underlying pace of inflation is still not in line with the Fed’s target,” Tiffany Wilding, North America economist at PIMCO, wrote in a note following the inflation release.

If price increases remain stubbornly high for several years, they can start to feed on themselves, with consumers constantly asking for higher price increases and companies making larger or more frequent price changes to cover rising labor bills. That’s the kind of self-fulfilling cycle the central bank is trying to avoid.

In the 1970s, officials allowed inflation to run slightly faster than usual for several years, creating what economists called “psychology of inflation.” When oil prices increased for geopolitical reasons, a An already inflated inflation base And high inflation expectations helped price hikes rise sharply. Central bank policymakers eventually raised rates Almost 20 percent It pushed unemployment back into double digits to bring prices back under control.

Central bankers today want to avoid repeating that painful experience. For now, they expect to raise interest rates slightly in early 2023, then leave them higher for a while to rein in the economy.

“Restoring price stability may require keeping policy at a restrained level for some time,” Fed Chairman Jerome H. Powell said. During a speech late last month. “We’ll stay in the study until the job is done.”

Ms Wilding said the labor market would slow significantly as early as 2023, and Mr Pantheon said. He also said it would allow the central bank to stop raising interest rates, as Shepherdson did.

“I think they will be done in February,” he said. But he expects rates to stay relatively high — just shy of 5 percent — over the long term, preventing the central bank from letting up too soon and allowing inflation to build back up.

“They’re going to be very cautious: their fingers have been burned.”

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