2024-01-11 06:25:00
Analysts estimate that U.S. consumer inflation increased slightly in December 2023, but underlying price pressures continued to ease, raising hopes that the U.S. economy can avoid recession.
–Economists surveyed by The Wall Street Journal estimate that U.S. consumer prices overall rose 0.2% in December 2023 from the previous month and 3.2% from the same period a year earlier. In comparison, the month-on-month increase in November 2023 was 0.1%, and the year-on-year increase in December 2023 accelerated slightly from the 3.1% increase in November.
–According to economists’ estimates, core prices excluding food and energy commodities increased by 0.3% in December 2023 from the previous month and by 3.8% from the same period last year. This will be the same as the month-on-month increase in November 2023, but the year-on-year increase will be slightly slower than the 4% increase in November 2023.
— Falling inflation means consumers’ money is more durable, but there are still some areas where prices are rising rapidly, such as auto insurance and repairs and pharmaceuticals. The rapid cooling of core price gains over the past year has raised hopes of a soft landing, in which inflation can be contained without a spike in unemployment or a recession.
–The U.S. Department of Labor is scheduled to release its December consumer price index report at 8:30 a.m. ET on Thursday.
“The progress on inflation since June 2022 has been remarkable,” said David Kelly, chief global strategist at JP Morgan Asset Management. “At the very least, the most likely path for inflation going forward is not upward or sideways. , but downward.”
Inflation approaches target
Thursday’s report won’t change Fed officials’ plans to keep policy rates steady at their next meeting on Jan. 30-31, but some analysts believe a rate cut might follow if monthly inflation data remains benign.
Inflation is approaching the Federal Reserve’s 2% target earlier than economists expected a few months ago. In November last year, the U.S. Department of Commerce’s core personal consumption expenditures (PCE) price index, an inflation indicator closely watched by the Federal Reserve, dropped to a six-month annualized rate of 1.9%.
With inflation slowing significantly over the past six months, the Fed’s focus is turning to when to cut interest rates from 23-year highs, rather than raise them. Officials predicted at least three rate cuts this year at their December meeting.
“This early progress on inflation paves the way for (the Fed) to cut interest rates earlier and faster starting in March,” said David Mericle, chief U.S. economist at Goldman Sachs. He said inflation rates were approaching 2%, and the labor market is roughly back to pre-pandemic conditions, all support this stance.
Inflation has fallen sharply from its recent peak of 9.1% in the summer of 2022, as factory production, supply chains and consumer habits normalize, as well as a recent cooling in the labor market.
“We are also now seeing lower inflation on the services side,” said Pooja Sriram, U.S. economist at Barclays. “This is critical to achieving the soft landing that the Fed is trying to engineer.”
New Year’s Eve
Americans expect price increases to slow in the coming years. This is important because these expectations can be self-perpetuating, and if consumers expect inflation to be high, they are more likely to demand higher pay rises and have to pay higher prices. A survey by the New York Fed showed that in December consumers’ median expectations for the annual inflation target three years from now was 2.6%, the lowest level since 2020.
Falling prices across many grocery categories and the downward trend in gas prices since hitting pandemic highs are among the driving factors influencing consumer perceptions. Rental price growth has also slowed, which might push inflation measures lower this year as housing costs weigh heavily in the budget basket used to calculate CPI.
Meanwhile, consumer spending held up as slowing inflation and strong wage growth boosted purchasing power.
Sriram said that while this is a promising sign for the economy, this resilience may hinder the pace of improvement in inflation. Repricing by companies at the start of the year may also put some upward pressure on inflation in the near term.
“Economic activity is slowing, but not sluggish. Labor market conditions are easing, but still quite tight,” she said. “As a result, we have some concerns regarding whether we can achieve a reduction in inflation as quickly as we have over the past few months.”
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