The outlook for U.S. inflation, which had already been steadily improving in recent months, was finally solidified over two days last week, just as the Federal Open Market Committee (FOMC) met.
The Consumer Price Index (CPI) and Producer Price Index (PPI) statistics for November, released on the mornings of December 12th and 13th, respectively, reflect the past six months of inflation measured by the US Federal Reserve’s most important inflation indicator. It suggested that the rate of inflation is likely to have returned to the target of 2% on an annual basis.
The unexpected development prompted some Federal Reserve officials to hastily revise their own forecasts ahead of their scheduled release on Tuesday afternoon. Economists are now more confident that inflation will be similarly contained over the next six months.
US Core Inflation Is Quickly Receding
Six-month annualized rate expected to fall to 2% in November PCE report
Source: US Bureau of Economic Analysis, Bloomberg Economics
This is expected to be formalized in the Commerce Department’s Bureau of Economic Analysis (BEA)’s Personal Consumption Expenditure (PCE) Price Index, which will be released on Wednesday morning, and could help strengthen the case for lower interest rates in the coming quarters.
Throughout all of 2022 and the first half of 2023, Fed watchers have become accustomed to “focusing on realized inflation,” said Brelina Urch, chief U.S. economist at T. Rowe Price. But the Fed is now “looking at the outlook for inflation” to avoid undershooting its target, she said.
The Fed’s weighted PCE Composite Price Index and PCE Core Price Index use several elements of the CPI and PPI released last week.
Combined, economists lowered their expectations for the PCE price index after showing weakness in key categories including goods other than food and fuel, financial services and some health care items.
The final US real gross domestic product (GDP) statistics for the July-September period (third quarter) released on the 21st provided even more good news. The PCE core price index for the same quarter rose at an annual rate of 2% compared to the previous quarter, the slowest growth since October-December 2020 (fourth quarter).
“Far from facing the widely anticipated ‘last mile’ problem,” economists at Goldman Sachs Group, led by Jan Hatchius, said in a note to clients on Thursday that PCE core inflation has fallen to its annualized rate in the first half of 2023. The rate appears to have slowed from 4% to 1.9% in the second half of this year.
Original title:US Inflation Report to Show Fed’s Battle Is Now All But Complete(excerpt)
2023-12-21 16:10:00
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