The Fed pushed up interest rates again after cracking down on inflation

The Fed’s Preferred Gauge in the Inflationary Era: Results from the Latest Data and Implications for Real-Time Prices

The Federal Reserve’s preferred inflation gauge remained elevated in new data released on Friday, further evidence that the central bank is contending with a stubborn problem as it tries to choke off the worst inflation in four decades.

The Bureau of Economic Analysis said the Personal Consumption Expenditures price index rose by 6.2% from a year ago in August. That was viewed as a driver behind the central bank’s decision to raise its benchmark rate by three-quarters of a percentage point for the third time in a row earlier this month.

The Fed’s latest economic projections that were released last week showed that board members were expecting inflation to remain slightly higher for longer than previously forecast. Fed board members expect the PCE to end at 3.1% and core PCE to end next year at 3.5%, above the central bank’s target rate.

The Federal Reserve Chair, who has vowed to make taming inflation a central bank goal, is under additional pressure because of the latest inflation data.

The so-called core index rose more than expected, after stripping out food and fuel, and it was also more than the economists had predicted.

The Fed officials will be more attentive to the monthly figures and what happened in August and September. While the annual numbers reflect what has happened cumulatively over the past 12 months, the monthly data give a clearer snapshot of how prices are evolving in real time.

Many economists think that inflation will moderate in the coming months as supply chains recover and a decline in used car prices make their way to buyers. They don’t expect the progress to be fast as rents and other service costs increase. But the progress has been bumpy so far.

The Fed says that it aims for 2 percent annual inflation on average even though it doesn’t use the Personal Consumption Expenditures measure.

The central bank’s policymaking arm raised its interest rate in seven meetings starting in March. The sharp hike in rates has started to filter through the economy, its effects showing up first in areas such as real estate, where mortgage rates were 6.27% this week, more than double the rate seen last year at this time, according to Freddie Mac data.

Last year economists were hopeful that global shipping and manufacturing would soon clear, while consumer spending would shift away from goods and back to services, and that a combination of the would allow supply and demand to come back into balance. That has happened, but slowly. It has also taken longer to translate into lower consumer prices than some economists had expected.

Service inflation is closely related to the job market. For companies including hair salons, restaurant chains and tax accountants, paying employees is typically a major, if not the biggest, cost of doing business. When workers are scarce and wages are climbing rapidly, businesses are more likely to raise their prices to try to cover heftier labor bills.

The low unemployment and fast wage growth of the past year makes it possible for prices to increase faster than usual, even though the job market isn’t a big driver.

That is where Fed policy could come in. Companies can only charge more if their customers are able — and willing — to pay more. The Fed can stop that chain reaction by lifting interest rates to slow demand.

Fed Federal Reserve Interest Rates Decemember Inflation Benchmark: Predictions and Implications for Consumer Prices, Housing, and Energy

The government reading showed inflation was running at its lowest rate in nearly a year.

The Fed chairman said that the board has a long way to go to get back to price stability after announcing a smaller rate increase.

Many Americans, already contending with price increases in nearly every part of their lives, are feeling the effects as they pay more in interest on credit cards, mortgages and car loans. The interest rate on used cars is more than double the average interest rate for last year, and buyers are making the biggest monthly payments on record.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the central bank said in a statement on Wednesday.

The stock market fell as investors realized that there are more rate hikes to come. The major indices were mostly unchanged by mid-afternoon.

Rents continue to climb, but Fed officials believe the worst of shelter inflation may be behind us. The increase in rents has slowed since this spring.

The price of haircuts rose 6.8% in the last twelve months, while the price of dry cleaning jumped 7.9%. Services other than housing and energy are the majority of consumer spending.


The November Bureau of State Survey of the Consumer Price Index (PCE) and a Measurement of Enhanced Inflation in the Services Sector

“We think goods prices will come down,” Powell said. “We understand what will happen with housing services. There isn’t much progress there and the big story will be the rest of it. And that’s going to take some time.”

The job market is out of balance, with too many job openings and too few available workers, says Powell. The U.S. economy has replaced the jobs lost during the Pandemic, but the share of adults who are working or looking for work has not fully recovered.

Many older workers who retired in the last two years may not return to the job market. With the supply of workers constrained, the Fed is trying to restore balance by tamping down demand.

Higher borrowing costs make it more expensive to get a car loan, house or carry a balance on a credit card. That’s already curbing demand in some of the more sensitive parts of the economy, like the housing market.

The annual increases for both PCE inflation indexes hit their lowest levels since October 2021 and follows continued declines in other inflation gauges, such as the Consumer Price Index and Producer Price Index.

Spending rose in November but at a slower rate than in previous months. Spending was up in November as compared to the month before. Personal income increased in November, but not as much as in October.

The November PCE report, the last major inflation gauge released in 2022, provided a snapshot of an economy in transition. Tasked with reining in the highest inflation since the early 1980s, the Fed has undertaken a series of blockbuster interest rate hikes to squelch demand.

Inflation in the services sector has not fallen as quickly as it could have. Friday’s PCE report showed the services index posted a monthly increase of 0.4% – unchanged from October’s rate – and a year-over-year increase of more than 11%, Faucher noted.

While much of the services inflation is due to housing costs, which are rapidly reversing, the Fed is concerned that strong wage growth could fuel persistent increases in services prices and overall inflation, he added.

“The Federal Open Market Committee will continue to increase the fed funds rate in early 2023 until it becomes more apparent that the job market is cooling, and wage growth and services inflation are slowing to more sustainable paces,” he added.

The Declining New Orders for Manufacturing Products in the First Three Months of the Swine-Fluding Epidemic

The Commerce Department report said that new orders for manufactured goods dropped in November, the biggest monthly drop since the beginning of the swine Flu epidemic.

Transportation equipment, specifically new orders for non-defense aircraft and parts, drove the decline, according to the report. Excluding transportation new orders increase.

Diane Swonk, Chief economist for KPMG, stated after the report’s release that core durable goods orders slowed but did not contract. The prelim reading for December suggests that manufacturing activity will contract at the end of the year. A cold winter expected for the manufacturing sector.

The final December reading of consumer sentiment was up slightly from a preliminary reading of 59.1 and the final reading of 56.8 in November.

Consumers clearly welcomed the recent easing of inflation, according to the director of the Surveys of Consumers. “While sentiment appears to have turned a corner from its all-time low from June, consumers have reserved judgment about whether the trends will continue.”

She added: “Their outlook for the economy may have improved, but it remains relatively weak. The sustainability of robust consumer spending is contingent on continued strength in incomes and labor markets in the quarters ahead.”

The consumer confidence index from the Conference Board reached its highest measurement in more than two years earlier this week.

The End of a Great November: Economic Recovery and Consumer Prices in the USA after a Very Hard Times, and the Lowest Annual Inflation Rate in the Past 40 Years

The stock market had a rough time, with one-fifth of the S&P 500’s value vanishing and the tech-laden benchmark dropping by more than 30%. All three major US markets experienced their worst years in a long time.

Hiring remains surprisingly resilient. In November, the economy added a robust 263,000 jobs, and the unemployment rate fell to 3.7% from 15% in the spring of 2020.

New numbers published last week show first-time applications for unemployment benefits edged up to 225,000. It is still historically low and almost exactly the same place as it was a year ago.

Mark Zandi, chief economist for Moody’s Analytics told CNN that this is a reason to be optimistic the economy could skirt a recession. “Without mass layoffs, it’s unlikely consumers will stop spending and the economy suffer a downturn.”

Consumer prices soared by 7.1% year-over-year in November. That would be close to being alarmingly high at most other points in the past 40 years. This month was the fifth straight that the improvement was positive and the fifth straight that the decrease was significant. It’s also the lowest annual inflation rate in nearly a year.

After spiking above $5 a gallon for the first time ever in June, gas prices have plunged. The national average for regular gasoline is now $3.10 a gallon, an eighteen-month low, but it has crept higher recently to about $3.22 a gallon.


The Fed Isn’t Ready for a Rate Cut: Implications for the Consumer Cost of Living, Food, Fuel, and Housing

If the Fed doesn’t already do that, it will eventually raise rates high and keep them there for so long that it will cause a recession.

Powell made it clear that the Fed isn’t ready for a rate cut and that this wouldn’t hurt the economy. It would be a positive if it removed its foot from the brake.

Core inflation has begun to cool off and will get back to something more comfortable over the course of the next 18 months, according to Zandi.

The Fed Chair thinks that core services that don’t include housing may be the most important category for understanding future inflation.

Over the past year, an alphabet soup of otherwise wonky economic statistics have become household names as American families suffered through the worst inflation in 40 years: CPI (Consumer Price Index), PPI (Producer Price Index), PCE (Personal Consumption Expenditures and ECI (Employment Cost Index).

Each of these reports has shown how prices for food and fuel and housing have risen much faster than wages for most of the past year, driven by huge consumer demand coupled with supply chain snags and the war in Ukraine.

The wage-growth stat highlighted by white house economists suggest that inflation may not be as strong as the Fed thinks. The supercore wage reading has fallen from 8% to just over 5% in January, according to the White House Council of Economic Advisers.

“The Fed focuses on supercore because it includes those prices that are more likely to be driven by the cost of labor, which the Fed can more directly impact through changes in interest rates,” he said.

“Pervasive price pressures across categories of spending that are necessities — shelter, food, electricity, apparel, vehicle insurance, and household furnishings and operations — show that broad-based improvement on the inflation front is still lacking,” said Greg McBride, chief financial analyst at Bankrate.

So there is a risk that January CPI could disappoint, McBride cautioned. The December headlines included falling gas prices which have since reversed.

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