Is inflation in the U.S. getting better or worse? For economic forecasters, the answer, at the moment, appears to be neither.
Instead, price growth may actually be stuck at its current rate — not super fast, but not slow enough to ease concerns among economic policymakers that consumers won’t continue to experience an uncomfortable pace of price growth.
On Wednesday, the Bureau of Labor Statistics will release the latest reading of the consumer price index for November. Analysts polled by Dow Jones in advance of the report predicted an inflation picture that was relatively unchanged compared with October, with the so-called core measure, which strips out more volatile items like food and gas, coming in at 0.3% growth month on month and 3.3% year on year.
That stalled progress would be worrisome for the Federal Reserve, which had hoped to continue to bring down interest rates as the new year began in tandem with slower price growth. Now, analysts are saying it’s highly likely the Fed will pause its rate-reduction plans in January.
A host of factors likely contributed to November’s potentially problematic picture, including rent prices that remain elevated and a rebound in used car prices, alongside car insurance premiums that continue to creep upward.
More generally, the economy, to a great degree, remains propped up by upper-middle-class and high-net-worth individuals who are more resistant to — and, by way of their spending, can sometimes accelerate — price growth. These consumers have seen the values of more expensive assets like stocks and real estate soar, even as prices for everyday goods have also increased in recent years, pinching the pocketbooks of everyone else.
It’s a major reason why Donald Trump fared better among less-well-off voters in November’s presidential election.
Yet it is unclear whether hopes of reduced household financial stress under Trump’s second term in office will be realized. Economists generally believe that Trump’s tariffs and deportations plan will prove inflationary and subsequently bad for growth; Trump himself told NBC News last weekend that he couldn’t guarantee that tariffs wouldn’t end up increasing prices.
That further complicates matters for the Fed as it tries to engineer a “soft landing” for the U.S. that brings inflation down without dramatically slowing the economy.
Wall Street traders are nearly unanimous in their forecast that the Fed will cut its key interest rate by another quarter point when it meets next week for its final gathering of 2024.
After that, all bets are off.
“November’s data likely will show that progress in reducing core CPI inflation has stalled since June,” Pantheon Macroeconomics Chief Economist Ian Shepherdson wrote in a note to clients this week. As households’ medium-term inflation expectations continue to remain elevated, he said, the Fed “will be unwilling to assume any tariff-led consumer price inflation next year will be wholly transitory.”
“Accordingly, we expect the FOMC [the Federal Reserve] to reduce the funds rate less quickly than required to stabilize the unemployment rate,” he said.
What’s more, it’s not even clear that interest rates in the rest of the economy are substantially responding to the rate cuts the Fed has enacted. Credit card interest rates continued to increase in the third quarter, while the average 30-year mortgage rate, though less directly affected by Fed actions, continues to hover just below 7%.
Yet the impact from higher rates appears to be largely felt by consumers who are not as well off. Mark Zandi, chief economist at Moody’s Analytics, believes wealthier Americans have continued to benefit from the staggering run-up in asset prices.
Yet that trend could easily be halted, he said; indeed, many of those assets are already “overvalued.”
“Anything that doesn’t stick to the script” and changes the economic outlook, like higher inflation or slower growth, “could cause a serious sell-off and be a problem for the broader economy,” Zandi said.
“It’ll all happen very quickly — everything’s OK, and then it’s not.”
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