WASHINGTON, Jan 22 (Reuters) – U.S. Federal Reserve
officials suspected the fight to lower inflation would be
difficult and have been reluctant to declare success even as
price increases have slowed.
The data from December showed why.
Overall consumer price inflation jumped, while a measure of
underlying inflation fell. Producer prices, the costs that
figure into what consumers eventually pay, dropped, and an
indicator of the margins added by retailers fell sharply – a
possible sign of developing price competition.
But shelter costs keep rising, as do prices charged for an
array of services like auto insurance. An Atlanta Fed wage
tracker recently showed bigger pay raises for people remaining
in their jobs, a finding that runs counter to the notion that
the labor market was settling down after a period marked by high
wage gains.
Add it up and Fed policymakers say they still need more
evidence to convince them that inflation will return to the U.S.
central bank’s 2% target and stay at that level before they
commit to interest rate cuts that financial markets expect to
begin perhaps as early as March.
STRIKING DISTANCE?
While some inflation factors have turned decisively in the
Fed’s favor, others remain unresolved.
The central bank’s next policy meeting is scheduled for Jan.
30-31. Officials are expected at the end of that meeting to keep
the Fed’s benchmark overnight interest rate steady, as they have
since July, in the 5.25%-5.50% range.
Comments last week by Fed Governor Christopher Waller show
the two overarching ideas that will frame the debate as
policymakers consider when to start reducing borrowing costs
that rose at a record pace over 2022 and 2023 to cool the worst
inflation outbreak since the 1980s.
Inflation, Waller said, is now “within striking distance” of
the Fed’s goal, with the personal consumption expenditures (PCE)
price index the Fed uses as its benchmark running right at the
2% target on a six-month basis through November. Data for
December will be released on Friday. On a year-over-year basis,
PCE inflation is down to 2.6% from a high of 7.1% in June of
2022 and is expected to keep edging lower.
Yet even if the risk of a resurgence has diminished, “the
worst thing we could have is it all reverses, and we’ve already
started to cut,” Waller said. “We really want to see evidence
that this progress, this trend … continues. I believe it will.
We have to see that before we can start making decisions.”
BEYOND BASE EFFECTS
What will create that conviction?
For the next few months, basic arithmetic should help as
high inflation readings from early 2023 fall out of the
calculations.
But Fed policymakers will try to look beyond that to see how
different inflation components are behaving over shorter periods
to get a sense of whether businesses really are becoming less
aggressive in setting prices.
It is already happening for many goods, where prices in
general fell about 1% from September through December. When
volatile food and energy items are excluded, goods prices have
been falling for seven months. Inventories are flush after a
pandemic-era rebuild, and inventory-to-sales ratios are roughly
where they were before the health crisis.
For the Fed it is a welcome return to a familiar world.
Falling goods prices were a byproduct of trade liberalization in
the 2000s and helped anchor low inflation through 2019, until
the COVID-19 pandemic threw global supply chains into disarray,
consumer goods demand jumped because of the health crisis, and
prices soared. At their peak in February 2022, goods prices
excluding food and energy products were rising 12.3% annually.
But policymakers also don’t want to rely on that too much,
and recent developments, like the strikes by Iran-aligned Yemeni
militants that…
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