The Fed’s Preferred Inflation Gauge Sped Back Up

President Biden took a rosier view than financial markets, emphasizing the decline in gas prices and the strength of the broader economy.

“Today’s report shows we have made progress on inflation, but we have more work to do,” he said in a statement. “Annual inflation in January is down from the summer, while the unemployment rate has remained at or near a 50-year low and take-home pay has gone up.”

Fed policymakers have raised rates at the fastest pace since the 1980s over the past year, lifting them from near zero to more than 4.5 percent. The goal was to slow consumer demand and force companies to charge less, ultimately wrestling inflation lower.

There are hints that those efforts are having an effect, despite the hot start to 2023. The housing market has slowed sharply as mortgage rates have risen, and manufacturers, too, have pulled back. Even consumer spending, viewed over several months, has tempered somewhat from its furious pace earlier in the recovery.

But what had looked like a steady, albeit gradual, slowdown is now looking even more gradual, and not so steady. Personal spending, which fell slightly in November and December, jumped 1.8 percent in January, faster than inflation. Incomes rose as well, which could help keep spending strong in the months ahead.

The remarkable resilience of both consumers and the job market suggests that, despite the dour predictions of many forecasters, the economy is in little imminent risk of falling into a recession. But it could also make it difficult for the economy to slow enough that businesses charge less and inflation eases fully back to normal. That could, in turn, force the Fed to get even more aggressive — and increase the risk of a more severe recession down the road.

Officials signaled in December that they might need to ultimately lift rates to just above 5 percent, but those estimates have crept slightly higher in recent weeks as policymakers have reacted to surprisingly strong data on jobs and spending.

Article source: https://www.nytimes.com/2023/02/24/business/economy/inflation-spending-fed.html