Inflation slowed last month thanks to cheaper fuel and airfares.
For the Federal Reserve, Thursday’s inflation report confirmed that the slowdown in price gains that officials have been expecting is coming to fruition.
Given that, the figures could help policymakers to feel comfortable downshifting the pace of interest rate increases. Officials slowed their rate moves in December and have made it clear that they might dial them back further in February — adjusting policy a quarter point (also referred to as 25 basis points) at a time, instead of continuing with the more aggressive adjustments they made throughout 2022.
“I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, said in a speech on Thursday. “In my view, hikes of 25 basis points will be appropriate going forward.”
But the fresh inflation data does little to suggest that the problem of rapid price increases has been fully solved, so central bankers are likely to raise borrowing costs slightly more over the coming months and then leave them elevated for some time to fully wrestle inflation under control.
Core services prices excluding housing costs, a measure that both the Fed and economists are watching closely, picked up 0.3 percent in December on a monthly basis. That was up from 0.1 percent in November, according to calculations by Omair Sharif, founder of Inflation Insights.
“What we’ve done is made a pivot from goods inflation,” Mr. Harker said in a question-and-answer session following his speech. “Service inflation ex-shelter is still running really high.”
Many central bankers think that to get services inflation under control, they need to slow down the job market and tamp down wage gains. Otherwise, companies facing larger labor bills are likely to continue passing those costs along to consumers.
“The biggest cost, by far, in that sector is labor,” Jerome H. Powell, the Fed chair, said at his latest news conference in December. “And we do see a very, very strong labor market, one where we haven’t seen much softening, where job growth is very high, where wages are very high.”
Fed policymakers first slowed interest rates increases in December after a series of rapid moves in 2022, and seem potentially poised to slow them down further at their Feb. 1 rate decision. But they still expect to raise rates at least slightly more and then keep them high until they see convincing evidence that price increases are moderating, even if that inflicts some economic damage.
Article source: https://www.nytimes.com/live/2023/01/12/business/december-cpi-inflation-report/inflation-gas-discounts