US Consumer Inflation Pressures Eased in December, Fed Sees Chance for Rate Cuts

The US consumer inflation pressures eased further in December 2023, according to the latest data from the Labor Department. The core inflation, which excludes volatile food and energy costs, rose 0.2% from November and 3.8% from a year ago, down from 4% and 4.1%, respectively.

The core inflation is considered a better gauge of the likely path of inflation, as it excludes costs that typically fluctuate sharply from month to month. The overall inflation, which includes all items in the consumer price index (CPI), rose 0.2% from November and 3.2% from a year ago.

US Consumer Inflation Pressures Eased in December, Fed Sees Chance for Rate Cuts
US Consumer Inflation Pressures Eased in December, Fed Sees Chance for Rate Cuts

The Federal Reserve, which has been fighting inflation with aggressive monetary tightening since March 2022, has declared what amounts to a ceasefire after raising interest rates by an average of 11 times since then. The Fed stopped raising rates in July 2023, after imposing an aggressive rate hike cycle to take time to see how the economy would respond.

The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, which is used to calculate the federal funds rate target range of zero to 0.25%, also showed signs of cooling down in December. The PCE price index rose 0.4% from November and 5% from a year ago.

The Fed’s preferred inflation gauge has been running well above its long-run target of 2%, reflecting strong demand for goods and services amid the economic recovery from the pandemic-induced recession.

The Fed sees hope for achieving a soft landing by cooling the economy just enough to tame inflation without causing a recession

The easing of inflation pressures has given the Fed more confidence that it can achieve its dual mandate of maximum employment and stable prices by cooling the economy just enough to tame inflation without causing a recession.

The financial markets have also become increasingly optimistic that the Fed can soon begin cutting rates again, which would lighten borrowing costs for consumers and businesses and stimulate economic activity.

According to a survey of forecasters by FactSet, economists expect the Fed to start reducing its balance sheet purchases later this year or early next year, after they reach their peak level of $120 billion per month in November.

The balance sheet purchases are part of the Fed’s quantitative easing (QE) program that it launched in response to the pandemic-induced financial crisis in March 2020. The QE program involves buying large amounts of Treasury securities and mortgage-backed securities (MBS) from banks and other financial institutions to inject liquidity into the economy and lower long-term interest rates.

The QE program has helped support lending conditions and asset prices during the pandemic-induced recession that lasted from February to April 2020. However, as economic activity picked up and inflation surged above expectations, some analysts have argued that QE should be tapered off gradually or stopped altogether to prevent overheating or creating asset bubbles.

The public is exasperated with prices that are still high despite steady economic growth

Despite the easing of inflation pressures in December, many Americans are still dissatisfied with their purchasing power and living standards amid high prices for goods and services.

According to a recent survey by YouGov/CBS News/NYT/YouGov poll conducted between December 9-12 among adults aged 18 years or older across all states except Alaska:

  • 68% said they were very or somewhat worried about their finances
  • 66% said they were very or somewhat worried about their household’s ability to pay bills
  • 64% said they were very or somewhat worried about their household’s ability to save money
  • 62% said they were very or somewhat worried about their household’s ability to afford basic necessities such as food
  • 60% said they were very or somewhat worried about their household’s ability to afford basic necessities such as housing
  • 58% said they were very or somewhat worried about their household’s ability to afford basic necessities such as health care
  • 56% said they were very or somewhat worried about their household’s ability to afford basic necessities such as education
  • 54% said they were very or somewhat worried about their household’s ability to afford basic necessities such as transportation

These worries reflect how high prices have eroded consumers’ real incomes and savings amid strong demand for goods and services amid fiscal stimulus measures such as direct payments ($1,400 per person), expanded unemployment benefits ($300 per week), enhanced child tax credit ($3,600 per child), infrastructure spending ($1 trillion), social spending ($1 trillion), tax cuts ($1 trillion), etc.

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