Inflation: Some Americans are willing to accept a recession for lower prices
New research shows that even when reminded that falling prices usually lead to a recession, 37% of people would accept this for lower prices.
If another Federal Reserve decision on interest rates is the focus of this week's economic news, Tuesday's inflation report will almost certainly set the table.
Investors are hoping a second consecutive weak consumer price index (CPI) report will boost Fed confidence as interest rates remain steady after a two-day meeting on Wednesday – an outcome that is all but certain.
Markets would also like inflation data to help officials accelerate expected rate cuts in their forecast for next year. The prospect of accelerating interest rate cuts – which typically make stocks more attractive than bonds – has already sparked a sharp market rally over the past six weeks.
But that could be a big challenge.
While Tuesday's CPI report is expected to show headline inflation fell further in November, an underlying measure the Fed is watching more closely is likely to have risen again, economists say. That probably wouldn't prompt the Fed to raise interest rates, but it could lead Fed officials to at least keep that option open and reject the idea that rate cuts will be pushed up, forecasters say.
“We believe this increases the likelihood that the tightening bias in the (Fed) statement (the message that the Fed is prepared to raise rates again if necessary) will be maintained,” Barclays wrote in a research note.
Other economic reports from last week could also influence the Fed's outlook on Wednesday. Consumer inflation expectations fell sharply this month, which should help keep prices under control. And the labor market overall continued to cool in November, even though the unemployment rate fell.
Has inflation eased in the US?
Inflation has slowed significantly since hitting a 40-year high of 9.1% in June 2022 due to COVID-related product shortages and a surge in consumer demand. However, at 3.2%, it is still well above the Fed's 2% target.
To curb rising prices, the Fed raised its key interest rate from near zero to a 22-year high of 5.25% to 5.5% early last year. But Fed officials have put rate hikes on hold since July, and with both inflation and the job market cooling, most economists believe the central bank is done raising rates.
Last month, CPI data showed that annual inflation fell sharply from 3.7% to 3.2% in October. A key metric that excludes volatile foods and energy products also fell from 4.1% to 4%. That helped raise hopes that the Fed would cut interest rates and boost stock markets.
Can inflation be expected to fall?
According to Barclays and Nomura, the November CPI report is expected to show that consumer prices remained roughly flat on a month-on-month basis for the second straight month, reducing the annual gain to 3.1%. The decline is likely due to a further decline in gasoline prices and a slight increase in food costs, the two research firms say.
But the core reading, which the Fed is closely watching, is expected to rise 0.3% from October, up from a 0.2% rise the previous month, and remain at 4% on an annual basis, economists say. That's not so bad, but it also wouldn't give the Fed any reason to let down its guard.
For which items does the price drop?
Prices for goods like furniture and cars are expected to fall further as pandemic-related supply chain disruptions ease.
But the cost of services – particularly rent, car insurance, car repairs and medical care – will likely continue to rise, Barclays says. That's at least partly due to rapidly rising wages driven by COVID-induced labor shortages.
However, inflation can fluctuate from month to month. One reason core inflation may have risen slightly in November, according to Barclays, is that hotel prices were likely to remain flat after falling in four of the last five months.
That could have helped lift “supercore” inflation – a key measure of services prices that excludes housing and which the Fed is watching particularly closely – to 0.39% from 0.25% the previous month, Barclays said.
Nomura, meanwhile, believes that both used car prices and airfares rose last month after previously falling. Barclays disagrees.
Solid but weak labor market November jobs report shows economy added 199,000 jobs; Unemployment at 3.7%
“Barring any major surprises, we do not believe the November CPI report will have a material impact on the Fed’s near-term outlook,” Nomura wrote to clients.
However, it could impact the tone of the Fed's statement and Powell's remarks at a news conference, as well as sentiment on Wall Street.