Time for the Fed to declare victory over inflation? not yet

A man pumps gas at a gas station in the Brooklyn borough of New York, US, December 13, 2022.

Michael Nagel | Xinhua News Agency | Getty Images

The December monthly drop in CPI brings the Fed a step closer to beating inflation, though it’s unlikely to signal policy easing any time soon.

The main measure of inflation It fell 0.1 percent for the monthIn line with market expectations, it was the largest decline since April 2020.

anyway Consumer price index for all items Still 6.5% ahead of a year ago, the arc has been steadily declining – from a peak of around 9% at an annual rate in June 2022 – amid sharp declines in gas prices, some seriously. The interest rate increases from the Federal Reserve.

The question now is how much more evidence policymakers will need to see before they get their feet off the brakes.

“If they’re making a forecast, which they should, he’d argue strongly that their rate hikes are over soon,” said Mark Zandi, chief economist at Moody’s Analytics. “There is nothing not to like about this report. Inflation will come [down] here.”

Dean Baker, chief economist at the Center for Economics and Policy Research, was more emphatic. In a tweet, Baker insisted, “It is time for the Federal Reserve to declare victory and stop raising interest rates!” He indicated a three-month decline in Service inflation minus shelter costs As evidence that inflation is on the run.

But given how aggressive central bankers have been since starting to hike interest rates in March 2022, and how cautious they have been about viewing isolated data points as part of a broader trend, the prospect of a win now looks remote.

After all, both headline and core inflation (previous food and energy) — up 0.3% for the month and 5.7% for the year — are still well ahead of the Fed’s 2% target. a chair Jerome Powell May recently said that services below the shelter component of inflation is a key consideration as rental costs are likely to come down later this year.

But he and his colleagues confirmed it, too The importance of keeping their guard up And they said they see more danger from easing than from continuing to push hard, even if it means bringing the economy to a near halt.

“Goldilocks” on the horizon?

Experts react to the December inflation report

Frederick said, referring to the next meeting of the Federal Open Market Committee March 15-16.

Markets are pricing in near certainty — 93.2% as of midday Thursday — that the FOMC will once again give up on its level of increase, to 0.25 percentage point on February 1, according to CME Group. The expectation is another quarter point in March, then a pause before the committee subtracts up to half a percentage point from the federal funds rate before the end of the year.

Philadelphia Fed President Patrick Harker said Thursday that he would prefer the Fed step down to quarter-point increments and then pause. His fellow policymakers have stated firmly that they see no future rate cuts in 2023.

But the market trades in another way.

The increase that followed the March meeting will give the FOMC time to consider the impact of all the increases, which would be nine in all, totaling 4.75 percentage points, if the market price is right.

What is not expected is any premature sign of a triumph over inflation.

“I don’t think they’re close to declaring victory,” said Simona Mokota, chief economist at State Street Global Advisors. “They’ll be very careful in saying it even though they might turn into [a quarter-point hike], which acknowledges the improvement in the data. But I don’t expect the tone and language coming out of the committee to change dramatically for some time. They consider that it is better to be safe than to be sorry again.

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