Federal Reserve Expected to Slow Rate Increases and Offer Hints at Future
But policy changes take time to fully play out, and the Fed wants to avoid accidentally squeezing demand so much that the economy contracts more than is necessary to wrangle inflation. That is why officials are moving away from super-rapid price increases and into a new phase where they focus on how high interest rates will rise and, perhaps even more critically, how long they will stay elevated.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
“How fast has been answered, and how high seems to be coming into sight — how long is the unknown,” said Michael Gapen, chief U.S. economist at Bank of America. “If we want to get inflation down to 2 percent, we still have to remove some labor market tightness.”
The Fed targets 2 percent inflation on an annual basis, but price increases were running at about three times that pace in the year through October, based on the central bank’s preferred index. A more timely inflation measure released on Tuesday, the Consumer Price Index, suggested that inflation slowed notably in November — which should give officials some reason for confidence.
But price increases for service categories, including dental care and sports games, remain rapid. At least one major driver of services inflation — rent — is likely to moderate in 2023. But for other service categories, rapid wage growth could make it difficult for inflationary pressures to cool completely.
Services outside of housing “may be the most important category for understanding the future evolution of core inflation,” Jerome H. Powell, the Fed chair, said during a recent speech. “Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category.”
Article source: https://www.nytimes.com/2022/12/14/business/economy/interest-rates-inflation-fed.html