Next steps

Inflation cools as Fed weighs next steps on monetary policy

Mellow inflation data for November might help President Joe Biden’s case that the economy is on safer footing than public polling suggests.

By SAM SUTTON

The latest inflation report shows an encouraging trend for the White House: a lack of anxiety-laden headlines.

Tuesday’s report on the consumer price index for November showed that consumer prices rose by 3.1 percent compared to last year, dipping slightly from the 3.2 percent recorded in October.

The latest inflation “print, while marginally above expectations, continued to reflect an encouraging trend,” Global X EFTs Portfolio Strategist Michelle Cluver said shortly after Tuesday’s release.

The numbers are unlikely to reignite fears that prices will surge in 2024. And in another promising sign, more Americans expect inflation to mellow over the next year, according to recent consumer surveys.

“It’s constructive and encouraging that the sturm und drang around these inflation reports is dissipating,” Joe Brusuelas, the principal and chief economist for the consulting firm RSM US, told POLITICO before Tuesday’s CPI release. “This is what you want from an economic and policy perspective.”

However, the overall picture on inflation remains varied. Housing costs continue to climb — particularly rent, which climbed at a monthly rate of 0.5 percent — as did the cost of medical care and prescription drugs.

As Federal Reserve Chair Jerome Powell warned last week: It would be “premature” to say the central bank has raised rates high enough — or kept them elevated for long enough — to assure the rate of inflation will fall to its annual target of 2 percent. Prices in “core” sectors of the economy — which excludes items in more volatile food and energy categories — climbed at an annual rate of 4 percent in November, which is well above what the Fed would like to see.

The Labor Department’s latest report landed just as the Fed’s open market committee kicked off its two-day meeting on monetary policy.

“I don’t think this is a great number for Fed officials, or market participants, hoping to change the conversation to rate cuts,” Omair Sharif of Inflation Insights said in a research note on Tuesday.

The market has put a 98.5 percent probability that the Fed will hold rates steady this week, according to CME FedWatch. Despite recent warnings from some central bank policymakers that rates may need to stay higher for longer, the growing consensus around Wall Street is that rates will fall next year as inflation concerns fade.

This isn’t the first time Wall Street analysts and economists have been sanguine about the Fed’s battle with inflation. What’s unique now is increased evidence that consumers have started to believe the hype.

Wage growth has been outpacing inflation for months. President Joe Biden’s reelection chances could depend on it, and a mellow CPI print for November might help his case that the economy is on safer footing than public polling of his performance suggests.

The Federal Reserve Bank of New York’s Center for Microeconomic Data’s November survey reported Monday that respondents now expect prices to climb by 3.4 percent next year — the lowest reading since April 2021. The University of Michigan’s consumer sentiment survey on Friday also found that inflation expectations have eased.

The improvement has corresponded with a decline in gas prices — from $3.82 in early August to $3.13 as of Tuesday, according to AAA — that often improves consumer outlooks. Gas prices are volatile, however, and the recent improvements in consumer sentiment could reverse if conflicts or supply cuts cause prices at the pump to surge.

For now, “we’re now moving toward tolerable levels of inflation,” Brusuelas said.