A closely watched inflation indicator cooled significantly in November. This is good news for the Federal Reserve as officials move to the next phase in their fight against rapid price increases, and positive news for the White House as voters see relief from rising costs.
The inflation measure of personal consumption expenditures, which the Fed refers to when it says it aims for average inflation of 2 percent over time, rose 2.6 percent for the year through November. That was down from 2.9 percent the previous month and less than economists had forecast. Compared to the previous month, prices overall actually fell slightly for the first time in years.
This drop – a 0.1 percent drop and the first negative reading since April 2020 – came as gas prices fell. After stripping out fluctuating food and fuel prices to more clearly see underlying price pressures, inflation rose slightly on a monthly basis to 3.2 percent for the year. That was down from 3.4 percent previously. While this is still faster than the Fed's target, the report provides the latest evidence that price increases are rapidly slowing and moving back towards the central bank's target. After more than two years of soaring inflation that has weighed on American shoppers and weighed on policymakers, several months of solid progress have helped convince policymakers that they may be on the verge of a turnaround.
Increasingly, officials and economists believe that a soft landing for the economy could be in sight – one in which inflation returns to normal without a painful recession. Fed policymakers held interest rates steady at their meeting this month, signaled they may be done raising rates and suggested they could cut borrowing costs even three times next year.
“Inflation is slowing much faster than the Fed expected — that could allow it to cut potentially soon and more aggressively,” said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities. “They’re really doing their best to provide a soft landing here.”
Based on market prices, the Fed is expected to begin cutting interest rates as early as March, although officials have argued that it is too early to talk about when rate cuts will begin.
“Inflation has come down from its highs, and it has done so without a significant increase in unemployment – that is very good news,” Jerome H. Powell, the Fed chairman, said at that meeting. Nevertheless, he emphasized that “the way forward is uncertain”.
Central bankers will likely watch closely for signs that inflation has cooled further as they consider when to start cutting interest rates. Some officials have suggested that stabilizing borrowing costs as price growth slows would effectively put more strain on the economy (interest rates are not price-adjusted, so after accounting for inflation, they rise when inflation falls).
Policymakers will also likely keep a close eye on consumer spending to figure out how much momentum is left in the economy.
The report released Friday showed consumer spending is still moderate. Personal consumption rose 0.2 percent since October and 0.3 percent when adjusted for inflation. Both metrics were faster than the previous month. This suggests that growth is still positive, although not quite as high as at the beginning of the year.
Officials still expect the economy to slow more significantly in 2024, a slowdown in demand that they say would pave the way for sustained slower price increases.
After a year in which inflation cooled quickly despite surprisingly strong growth, economists are expressing humility. However, policymakers remain concerned about a situation where growth remains too strong.
“If growth is robust, that probably means we will keep the labor market very strong; it is likely to put some upward pressure on inflation,” Mr Powell said at his press conference. “That could mean it takes longer for us to reach 2 percent inflation.”
That, he said, “could mean we have to keep interest rates higher for longer.”