Economic Report: Inflation appears to be slowing, but the Fed isn’t turning down the heat

by | Dec 21, 2022 | Stock Market

Even as the U.S. economy gets squeezed by rising interest rates and the threat of recession, mounting evidence suggests inflation is easing just as the Federal Reserve ratchets up the pressure. The yearly rate of inflation slowed to 7.1% in November, from 7.7% in the prior month and from a 40-year peak of 9.1% last summer, based on the consumer price index.

What’s more, the increase in the cost of many goods that drove the spike in inflation last year, such as used cars, has decelerated, in some cases quite rapidly. Used-vehicle prices have fallen 3.3% in the past 12 months, compared with a 41% yearly increase as recently as February. Soaring rents, another big driver of inflation, are also coming back down to earth. The cost of housing is the single biggest influence on the consumer price index. Yet senior officials at the Fed still aren’t persuaded that the rate of inflation is on a clear trajectory to their 2% goal — the rate they think is optimal for the economy. They don’t expect inflation to return to prepandemic levels at least until 2026, based on their most recent forecast. “It will take substantially more evidence to give confidence that inflation is on a sustained downward path,” Fed Chair Jerome Powell said last week after the bank raised interest rates for the eighth time this year. Other top Fed officials backed him up. The Fed lifted a key short-term rate to a top end of 4.5% — the highest in 15 years — and signaled it won’t stop until it hits around 5.25% or so. The rate was near zero just nine months ago. Senior Fed officials also made it clear in interviews after their meeting that they intend to keep the rate above 5% for all of 2023 — a more aggressive strategy than Wall Street had expected. “Despite the increasingly compelling evidence that core inflation will fall sharply next year, the Fed simply doubled down on its recent hawkishness,” said Paul Ashworth, chief North America economist at Capital Economics. The Fe …

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