Consumer price data, due to be released Thursday morning, is expected to provide Federal Reserve policymakers, the White House and American households with new evidence that inflation has slowed further. But some details of the report could also highlight setbacks in this progress – a cautionary reminder that it is still too early to declare victory in the fight against rapid price increases.
The Consumer Price Index, a measure of inflation compiled by the Labor Department, is scheduled to be released at 8:30 a.m. Eastern Time. The Fed sets its inflation target – 2 percent per year – based on a separate measure, but this is more related and more current. It will give economists their first clear insight into how inflation will develop towards the end of 2023.
Overall, inflation in December is likely to have risen slightly faster on an annual basis than in November: economists expect 3.2 percent in a Bloomberg survey, compared to 3.1 percent previously. This increase is likely to occur as energy prices are less significant than in November.
But after stripping out volatile food and fuel prices to get a sense of the underlying inflation trend, a “core” measure of inflation is expected to have risen 3.8 percent in the year to December, down from 4 percent earlier. That would be the first time since May 2021 that the core index fell below 4 percent.
After nearly three years of rapid price increases that have pushed up costs for consumers and strained the budgets of many households, further progress in reducing inflation would be welcome news for central bankers and President Biden.
Fed officials have raised interest rates significantly to slow the economy and try to control inflation: their key interest rate is now at 5.25 to 5.5 percent, after being near zero in early 2022. But as inflation cools, central bankers could start cutting interest rates this year.
Your job is to balance two goals. On the one hand, they want to ensure that inflation comes fully under control. On the other hand, they don't want to keep borrowing costs too high for too long and risk a recession that will cost jobs and drive up unemployment.
Policymakers have signaled they could cut interest rates three times this year. They are not yet ready to completely rule out the possibility of another rate hike before reversing course, but investors and many economists expect their next step will be to cut rates – perhaps as early as March.
For consumers, the decline in inflation means that prices for many everyday purchases — from goods like furniture to services like rent — will no longer rise as much. For some products, such as used cars, prices are actually falling, although the price level is usually still higher than it was a few years ago.
Still, wages are rising at a solid pace, which should help consumers catch up. Average hourly earnings have risen faster than the overall consumer price index on an annual basis since last summer.
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