After the U.S. Consumer Price Index (CPI) report was released in December last year, Wall Street Journal (WSJ) reporter Nick Timiraos, known as the Federal Reserve (Fed) megaphone, wrote on Thursday (12th) that this inflation data indicates that the Fed will The rate hike in February will be further narrowed to 1 yard (25 basis points), as cooling inflation suggests Fed officials will consider a smaller rate hike than in the past few months.
According to data released by the U.S. Department of Labor, the U.S. CPI increased by 6.5% in December last year, the sixth consecutive month of decline since its peak in mid-2022, in line with market expectations of 6.5%, a sharp drop from the previous value of 7.1%. It was down 0.1%, the first decline in two and a half years, lower than market expectations of 0%, and the previous value was 0.1%.
Excluding the volatile energy and food core CPI, the annual increase was 5.7%, a record low since December 2021, in line with market expectations of 5.7%, and the previous value was 6%; monthly growth was 0.3%, in line with market expectations, the previous value reported 0.2%.
Timiraos believes that while Fed officials are open to whether the next rate hike will be 1 or 2 yards, and say the decision will be influenced by the latest data on the state of the economy, improving inflation suggests that Fed officials are likely to consider a more traditional rate hike. A rate hike of 1 yard. It will take time for Fed officials to see the full effects of policy actions, and they are trying to avoid unnecessary job losses and lower economic growth.
The US CPI report showed that prices of commodities such as used cars fell, which Timiraos said was a development that the Fed had expected for more than a year. As for housing prices, he sees evidence that soaring rents and other housing costs will cool significantly amid a sharp slowdown in demand, but because of the way it’s composed, this won’t be reflected immediately in the CPI.
Timiraos also noted that Fed Chairman Jerome Powell has recently shifted focus from core inflation measures to a narrower range of labor-intensive services, excluding food, energy, housing and commodity prices. Fed officials believe the category could help indicate whether labor shortages that have been pushing up wages are transmitting pressure on consumer prices.
Additionally, Timiraos said some Fed officials were echoing Powell’s focus on services sector inflation. For example, Mary Daly, president of the Federal Reserve Bank of San Francisco, said that she is very concerned about the core service industry and hopes to see an improvement in inflation in this part.
According to estimates by economists at Morgan Stanley, inflation in the service sector, which the Fed focuses on, grew by 0.26% in December last year, far below the monthly average of around 0.5% for the year.
On the labor market, Timiraos said recent employment data pointed to steady hiring, with last week’s non-farm payrolls report showing that wage growth had slowed at the end of last year. He believes the wage data is very important to the Fed because they are concerned that the strength of the labor market will sustain wage growth and keep inflation above the Fed’s 2% target.
On interest rates, Timiraos believes Fed officials are trying to balance the risk of raising rates too much with the risk of not raising them enough, which could entrench inflation. From the perspective of the central bank’s interest rate hike cycle, Timiraos still believes that the Fed may raise interest rates to a level above 5%.