Washington (AFP) – The US inflation report for December released Thursday morning could provide another welcome sign that the worst price rally in four decades is slowly fading.
Most economists project a more optimistic scenario: They think December was another month in which inflation, while still uncomfortably high, continued to ease. According to a survey by data provider FactSet, analysts expected consumer prices to rise 6.5% in December compared to a year earlier. That would be from below 7.1% in November And much less a 40-year high of 9.1% in June.
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On a monthly basis, economists believe prices were flat in December. More importantly, the closely watched measure of “core” prices – which excludes volatile energy and food costs – is expected to have risen just 0.3% from November to December and 5.7% from a year earlier. The Fed closely tracks base rates, which it considers a more accurate indicator of future inflation, in determining its interest rate policies.
Another modest rise in core rates would increase the likelihood that the Fed will raise the benchmark interest rate by just a quarter point, rather than half a point, when its next meeting ends on Feb. 1.
For now, inflation is falling, as the national average price for a gallon of gas has fallen from $5 a gallon in June to $3.27 a gallon As of Wednesday, according to AAA.
The supply chain falters, which previously inflated the cost of goods so far. Consumers have also shifted much of their spending away from physical goods and instead toward services, such as travel and entertainment. As a result, the cost of goods, including used cars, furniture and clothing, has fallen for two consecutive months.
Economists will pay particular attention Thursday to service prices, which are seen as a more stable component of inflation. They reflect rising wages among labor-intensive businesses such as restaurants, hotels, and healthcare companies.
If the data shows only a slight increase in the costs of services, this is likely to boost hopes for the economy Stagnation can be avoided and instead experience a ‘soft landing’. Such a scenario would mean slow growth and possibly a slight rise in unemployment but much less economic hardship than a full-blown recession.
In fact, last week’s jobs report Enhanced the possibility of avoiding stagnation. Even after the Fed’s seven rate hikes last year and with inflation still rising, employers added a solid 223,000 jobs in December, and the unemployment rate fell to 3.5%, matching a 53-year low.
At the same time, average hourly wage growth has slowed, which will reduce pressure on companies to raise prices to cover higher labor costs.
“The idea of a soft landing has gained some credibility this year, and that has also sent the stock market higher,” said Michael Aron, chief investment analyst at State Street Global Advisors.
Another positive sign of the Fed’s efforts to quell inflation is that Americans generally expect price increases to be moderate over the next few years. This is important because so-called “inflation expectations” can be self-fulfilling: if people expect prices to continue to rise sharply, they will usually take steps, such as demanding higher wages, that can perpetuate high inflation.
On Monday, the Federal Reserve Bank of New York said that consumers now expect inflation of 5% over the next year. This is the lowest such forecast in nearly 18 months. Over the next five years, consumers expect inflation to average 2.4%, just above the Federal Reserve’s target of 2%.
However, in their remarks in recent weeks, Fed officials have reiterated their intention to raise the benchmark short-term interest rate by an additional three-quarters of a point in the coming months to just over 5%. And such increases would come on top of seven hikes last year, which caused mortgage rates to nearly double and made auto loans and business borrowing more expensive.
Futures prices show that investors expect the central bank to be less aggressive, implementing only quarter-point increases by March, leaving the Fed rate just under 5%. Investors also expect the Fed to cut interest rates in November and December, according to the CME FedWatch Tool.
Fed Chairman Jerome Powell has sought to resist that expectation of smaller hikes in the spring and cuts by the end of the year, which could make the Fed’s job more difficult if investors raise stock prices and lower bond yields. Both trends could support faster economic growth when the Fed tries to cool it down.
The minutes of the Fed’s December meeting indicated that none of the 19 policymakers expected rate cuts this year.
However, James Bullard, President of the Federal Reserve Bank of St. Louis, last week expressed some optimism that this year, “actual inflation is likely to follow inflation expectations to a lower level,” suggesting that 2023 could be “a year of decline.” inflation.”
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