Consumer price data scheduled for Thursday morning are expected to provide policymakers at the Federal Reserve, the White House and US households with new evidence that inflation is continuing to slow. However, some of the report’s details may also show some impediments to this progress, a cautionary reminder that it is too early to declare victory in the battle against rapid price increases.
The Consumer Price Index, a measure of inflation produced by the Labor Department, is scheduled for release at 8:30 a.m. ET. The Fed sets an inflation target of 2% annually based on a separate measure, but this measure is linked and timely. It will give economists their first clear glimpse at how inflation will behave as 2023 comes to a close.
Overall inflation likely rose slightly more quickly in December than in November year-over-year: 3.2%, economists polled by Bloomberg expect, versus 3.1% previously. This rise is likely to come with a lower weight in energy prices than they were in November.
But after excluding volatile food and fuel prices to get a sense of the underlying inflation trend, the measure of “core” inflation is likely to rise 3.8 per cent in the year to December, down from 4 per cent previously. This will be the first time the underlying index has fallen below 4% since May 2021.
Continued progress in lowering inflation will be welcome news for central bankers and President Biden after nearly three years of rapid price increases that have raised costs for consumers and strained many household budgets.
Fed officials have raised interest rates significantly to slow the economy and try to control inflation: The key interest rate now stands at 5.25 to 5.5%, up from near zero in early 2022. But as inflation cools, central bankers can begin to cut interest rates. interest this year.
Their mission is to balance two goals. On the one hand, they want to make sure that inflation is completely under control. On the other hand, they do not want to keep borrowing costs too high for too long, which would risk a recession that would cost jobs and push unemployment higher.
Policymakers have indicated they may cut interest rates three times this year. They are not yet ready to completely rule out the possibility of another rate hike before they reverse course, but investors and many economists believe their next move will be to cut rates — perhaps as soon as March.
For consumers, lower inflation means that prices for many everyday purchases — from goods like furniture to services like rent — no longer rise sharply. In fact, the prices of some products, such as used cars, are falling, although price levels for most of them are still higher than they were a few years ago.
However, wages are rising at a strong pace, which should help consumers catch up. Average hourly earnings have been rising faster than the overall Consumer Price Index since last summer, on an annual basis.