Some Fed officials are surprised by the rapid decline in inflation in 2023 and appear to be setting a new hurdle for rate cuts: a broader retreat in price pressures.
Last week, Richmond Fed President Thomas Barkin and Boston Fed President Susan Collins said they not only want to see the decline in inflation continue, as many other officials have said, but also that the recent He signaled he wanted to expand more meaningfully into housing and other services given the economic slowdown. Driven by the product.
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“Are they shifting the goalposts and creating new benchmarks? It certainly seems like that,” said Michael Scordeles, head of U.S. economics at Truist Advisory Services. “They found sufficient grounds to persevere.”
Policymakers have held interest rates unchanged since July, and Fed Chair Jerome Powell is raising the possibility of a rate cut next month as officials seek more confidence that inflation is returning to their 2% target. It has already been stated that this is low. Waiting for a significant increase in disinflation could delay the first rate cut further.
The marked improvement in inflation seen in recent months, confirmed in the revised version released on Friday, is mainly driven by a reversal in energy prices, a recovery in supply chains and lower costs for items such as used cars and clothing. It is reflected. Service inflation has been eased by suppressing wage increases due to the influx of workers into the labor market, but progress is slowing.
Consumer prices for goods excluding food and fuel rose by only 0.2% in 2023. Meanwhile, the consumer price index for services excluding energy increased by 5.3%.
“I'm hopeful, but I still want more confidence that the slowdown in inflation is widespread and sustainable,” Barkin said in a speech last week. Barkin said on Bloomberg TV that he expects this trend to “continue and grow” as policymakers have “a few more months” of data available.
Fed officials will receive new information on inflation in Tuesday's CPI release, which is estimated to have fallen below 3% in January for the first time in nearly three years. The Fed's preferred indicator of underlying inflation rose 1.9% on a six-month annualized basis in December, which was actually below the Fed's 2% target.
“Most of the disinflation is coming from lower commodity prices, and there seems to be concern that that may not be sustained,” said Michael Geipen, head of U.S. economics at Bank of America. Stated.
Analyzing the data in different ways highlights why some officials are becoming more cautious about the inflation outlook.
Inflation rose at an annual rate of 3.3% in December, particularly outpacing the 2.6% rise in the government's Personal Consumption Expenditure Price Index, according to an inflation measure compiled by the Dallas Fed that excludes the most rapid price changes.
The Atlanta Fed's Consumer Price Index, which covers fixed costs, or costs that don't change frequently, has risen a hefty 4.6% over the past year, nearly double the pre-pandemic average. This indicator is often seen as a measure of corporate inflation expectations.
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“It's too high of a bar to expect all indicators to line up well, but if we see signs of sustained and broad-based progress, we can begin to make systematic adjustments to our policy stance,” Collins said last week. It will give me the confidence I need.”
Chairman Powell said in January that while his target was headline inflation, a reasonable assumption was that goods disinflation would level out over time, adding that “that would lead to an even higher contribution from the services sector.'' It will happen,” he said.
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Annual CPI revisions released on Friday confirmed the progress in inflation late last year and allayed concerns previously raised by Fed Director Christopher Waller. Economists also pointed to a brighter outlook for so-called supercore services, excluding energy and housing.
Powell and others cited the importance of these measures in assessing a country's inflation trajectory, although they base their calculations on a different measure.
“We find confirmation of the existing disinflationary narrative and the strengthening of disinflationary momentum in core services, particularly housing rents, to be highly significant,” economists led by Anna Wong of Bloomberg Economics said in a note. Ta. This would give “policymakers greater confidence in progress in eliminating inflation.”
Some officials fear that premature easing, followed by another round of inflation and subsequent interest rate hikes, could undermine public confidence and destabilize inflation expectations. There is. Atlanta Fed President Rafael Bostic said the change would be the worst outcome for policy.
“Inflation could pick up again. That's the risk,” said Diane Swonk, chief economist at KPMG LLP. “They're hedging and they feel like there's room to hedge that risk given how strong the economy is.”
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