Yet again, inflation data has surprised experts; except this time, inflation is moving even faster in the direction that the Fed wants it to, and that is a good sign. According to new data from the United States government, November inflation slowed down at a faster rate than expected. These data were seen as encouragement for the Federal Reserve, whose officials are gathering in Washington this week to consider further interest rate increases and other solutions to combat inflation.
The Fed’s policymakers will release their latest rate decision later today (2 PM EST) at the end of their two-day joint session. The expectation has been for them to raise interest rates by half a percentage point, which would have been a lot of years ago, when interest rate moves were much more subtle. But in 2022, the Fed has routinely increased rates by three-quarters, meaning that a half-point increase represents them letting off the brakes a bit. In addition to the rate decision, the Fed will also release new economic projections.
Yesterday’s new inflation figures will certainly influence future policies. The Consumer Price Index (CPI) showed a 7.1 per cent increase over last year. Again, although that sounds bad, many economists had predicted for prices to rise 7.3%, so a 7.1% figure is welcome news. Moreover, October’s annual inflation was at 7.7%, so things are moving in the right direction. The next measure most economists look at outside of standard inflation is core inflation, which cuts out food and fuel prices because they are far more volatile in price than other goods. Core inflation rose by 6 per cent, which is less than Bloomberg’s 6.1 per cent projection.
In total, inflation seems to have reached its peak in June, but the year has been shocking in many ways. Inflation that had begun to pick up at the end of 2021 was expected to cool all the way to 2% in 2023. Obviously, those numbers were way off the mark, although few could have predicted the Russian invasion of Ukraine, which certainly has not helped the situation. But the Fed’s explicit goal is to help. Central banks all over the world have been raising interest rates faster than they have in decades. Most interest rates were close to zero in early 2022, and now many rates stand between 4.25 and 4.5 per cent as of this week. Because borrowing costs are so much higher, the housing market has cooled, and it is now more expensive for businesses to expand and for people to finance major purchases like automobiles. Eventually, these brakes will lead to decreased demand, a less competitive job market, and a general slowdown of the economy. Moreover, economists predict that this weaker demand, coupled with fixed supply chains, should take some of the pressure off price increases.