The drop in inflation in November is a sign that the Federal Reserve is beginning to see success in its efforts to end the inflationary plague that has undercut families’ economic security and dragged down President Joe Biden’s approval ratings.
Inflation, as gauged by the consumer price index, slowed to a 7.1% annual rate in November, the Bureau of Labor Statistics reported Tuesday, a fairly steep drop of 0.6 percentage points from the month before.
The news came a day before the Fed’s monetary policy committee announces its plans for its interest rate target. The central bank has been hiking rates for nearly the entire year and has become increasingly aggressive with its increases, but now most Fed watchers expect a milder hike on Wednesday.
The central bank has carried out four straight hikes of three-quarters of a percentage point, or 75 basis points.
Most investors are expecting a smaller 50-basis-point hike following this week’s meeting.
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Investors are now pegging the odds of a 50-point hike at nearly 80%, up from 73% before Tuesday’s report, and pricing in only about a 20% chance of a 75-point hike, according to CME Group’s FedWatch tool, which calculates the probability using futures prices.
Still, it is worth noting that while 7.1% headline inflation is much better than the 9.1% inflation experienced over the summer, it is still far above the Fed’s target 2% level.
“While consumer prices are moderating, the Fed can’t relax because of persistent tightness in the labor market,” Victor Claar, associate professor of economics at Florida Gulf Coast University, told the Washington Examiner. “Ongoing wage pressure could translate into price inflation, and the Fed is keeping a close eye on that.”
A major factor in the higher inflation over the summer was energy prices. They have fallen off some in recent months but are still 13% more than they were a year ago. Meanwhile, soaring housing prices have offset some of the declines in energy prices.
“Consumers rejoice that the price of gasoline has dropped sharply. But rising prices for other necessities, most notably food and shelter, remain elevated and continue to strain household budgets,” said Mark Hamrick, senior economic analyst at Bankrate.
The slowdown in inflation is also good news for the labor market, which, while it has been performing superbly amid the rate hikes, is expected to take a battering from the tightening in the coming months.
That is because it is thought that Fed rate hikes affect the economy on a lag as businesses and households slowly adjust to the higher cost of borrowing money. Accordingly, many economists say it is difficult to raise rates quickly without inducing a recession.
By slowing the scale of future rate hikes, the Fed would be acknowledging that its strategy is starting to work and giving the economy a bit more room to breathe.
“Net inflation is cooling down, and this will enable Fed officials to slow it down when it comes to the pace of their rate hikes both at today’s meeting and in 2023,” said Chris Rupkey, chief economist at FWDBONDS. “It looks increasingly like inflation has reached a turning point where price increases are falling or little changed for many categories of goods and services that consumers buy.”
Because of the historic tightening cycle, many economists anticipate at least a mild recession sometime next year.
Some economists are still hoping that Fed Chairman Jerome Powell will be able to pull off a challenging “soft landing,” which is a scenario in which the Fed can ease down inflation without causing the unemployment rate to soar.
Patrick Luce, an economist with ITR Economics, predicted that while the housing and technology sectors will suffer — the housing market, given surging mortgage rates and slowing demand, is already in a downturn — the overall economy will avoid falling into a recession, although growth will slow.
“While select sectors like technology and single-unit housing are showing signs of weakness heading into next year, the broader macroeconomy will be categorized by slowing growth throughout 2023,” Luce said. “While the Federal Reserve’s actions do present challenges to the economy, the impacts of fast-rising interest take time to manifest and are more likely to be felt in 2024.”
Biden cheered the falling level of inflation during a speech after November’s CPI report was released, although he acknowledged that price growth is still well above where it should be in an ideal economy.
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“This is welcome news for families across the country as you get ready for your holiday celebrations and family dinners,” the president said.
“Prices are still too high. We have a lot more work to do, but things are getting better,” Biden added. “What is clear is my economic plan is working, and we’re just getting started.”
