A closely watched measure of inflation cooled markedly in November, good news for the Federal Reserve as officials move to the next phase in their fight against rapid price increases and a positive for the White House as voters they see relief from rising costs.
The measure of personal consumption expenditure inflation, which the Fed cites when it says it aims to average 2% inflation over time, rose 2.6% in the year through November. This was down from 2.9% in the previous month and is lower than economists expected. Overall, prices actually decreased slightly for the first time in years compared to the previous month.
This decline – a decline of 0.1% and the first negative data since April 2020 – occurred in conjunction with the decline in gas prices. After stripping out food and fuel price volatility to take a clearer look at underlying price pressures, inflation rose modestly month-on-month and to 3.2% year-on-year. This value is down from the previous 3.4%.
While this is still faster than the Fed’s target, the report provided the latest evidence that price increases are rapidly slowing toward the central bank’s target. After more than two years of rapid inflation that has burdened American shoppers and bedeviled policymakers, several months of solid progress have helped convince policymakers that a turning point may be coming.
Increasingly, officials and economists think they may be in sight of a soft economic landing, in which inflation returns to normal without a painful recession. Fed policymakers kept interest rates stable at their meeting this month, signaling they might stop raising interest rates and suggesting they might even cut borrowing costs three times next year.
“Inflation is slowing much faster than the Fed expected, which could allow them to cut early and more aggressively,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “They are really doing their best to ensure a soft landing here.”
The inflation trend is good news for the Biden administration, which has struggled to take advantage of strong economic growth and low unemployment at a time when high prices are eroding household confidence.
President Biden issued a statement celebrating the report, and Lael Brainard, director of the National Economic Council, called the slowing of inflation “a significant milestone” in a call with reporters.
“Inflation has fallen faster than even the most optimistic forecasts,” he said, noting that wage increases are outpacing price increases. While she did not directly comment on monetary policy, citing the central bank’s independence from the White House, she noted that households are already facing lower mortgage rates as investors expect a more lenient Fed.
Based on market prices, the Fed is expected to start lowering interest rates as early as March, although officials have argued that it is too early to talk about when rate cuts will begin.
“Inflation has come down from its highs, and that’s happened without a significant rise in unemployment — that’s great news,” Jerome H. Powell, the Fed chair, said at that meeting. However, he stressed that “the path forward is uncertain”.
Central bankers are likely to watch closely for signs that inflation has continued to cool as they consider when to start cutting rates. Some officials have suggested that holding borrowing costs steady when price increases are slowing could actually squeeze the economy further. (Interest rates are not price-adjusted, so they rise after excluding inflation as inflation declines.)
However, Fed officials have been reluctant to declare victory after repeated feints in which price increases have proven more stubborn than expected and at a time when geopolitical issues could complicate supply chains or push up gas prices .
“More favorable inflation data is certainly something to celebrate, but there is some turbulence ahead,” Omair Sharif, founder of Inflation Insights, wrote in a note reacting to Friday’s data. “Fed officials will want to get this done before shifting focus directly to rate cuts.”
Policymakers are also likely to keep an eye on consumer spending as they try to figure out how much momentum remains in the economy.
The report released Friday showed that consumers are still spending at a moderate level. The measure of personal consumption rose 0.2% from October and 0.3% after adjusting for inflation. Both readings were faster than the previous month. This suggests that growth is still positive, although it is no longer as strong as it was earlier this year.
Officials still expect the economy to slow more noticeably in 2024, a cooling in demand that they say would pave the way for sustainably slower price increases.
After a year in which inflation cooled rapidly despite surprisingly strong growth, economists are expressing humility. But policymakers remain wary of a situation in which growth remains too strong.
“If growth is solid, that will probably mean we keep the job market very strong; will likely put some upward pressure on inflation,” Powell said in his news conference. “This could mean it will take longer to get to 2% inflation.”
That, he said, “may mean we need to keep rates higher for longer.”