World News | Inflation report likely to show another month of cooling prices

WASHINGTON, Jan. 12 (AP) — U.S. inflation reports for December released Thursday morning may offer another welcome sign that the worst surge in four decades is slowly fading.

Or it could indicate that inflation has persisted enough to call for tougher action from the Fed.

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Most economists foresee a more optimistic scenario: They see December marking yet another month in which inflation, while still uncomfortably high, continues to cool.

Analysts forecast consumer prices rose 6.5% in December from a year earlier, according to a survey by data provider FactSet. That would be down from November’s 7.1 percent and well below the 40-year high of 9.1 percent set in June.

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On a monthly basis, economists see prices flat in December. What’s more, a closely watched measure of “core” prices — which exclude volatile energy and food costs — are expected to rise just 0.3% from November to December, and 5.7% from a year earlier. The Fed closely tracks core prices when setting interest rate policy, arguing that core prices are a more accurate indicator of future inflation.

Another modest rise in core prices would increase the likelihood that the Fed will raise its benchmark interest rate by just 25 basis points, rather than half a basis point, at its next meeting, which ends on Feb. 1.

Right now, inflation is falling, with the national average for a gallon of gasoline falling to $3.27 on Wednesday from a peak of $5 a gallon in June, according to AAA.

The supply chain chaos that previously inflated the cost of goods has largely been resolved. Consumers are also shifting the bulk of their spending from physical goods to services, such as travel and entertainment. As a result, the cost of goods including used cars, furniture and clothing fell for two straight months.

Economists on Thursday will pay particular attention to service prices, seen as a trickier component of inflation. They reflect higher wages at labor-intensive businesses such as restaurants, hotels and health care companies.

If the data shows only a small increase in the cost of services, that could boost hopes that the economy can avoid recession and experience a “soft landing”. Worse than a full-blown recession.

In fact, last week’s jobs report strengthened the odds of avoiding a recession. Employers added a solid 223,000 jobs in December and the unemployment rate fell to a 53-year low of 3.5 percent, even as the Federal Reserve raised interest rates seven times last year and inflation remained stubbornly high.

Meanwhile, growth in average hourly earnings has slowed, which should reduce pressure on companies to raise prices to compensate for higher labor costs.

“The soft landing narrative has gained some credibility this year, which has also led to a stock market rally,” said Michael Arone, chief investment strategist at State Street Global Advisors.

In another positive sign for the Fed’s efforts to curb inflation, Americans generally expect lower price gains in the coming years. This matters because so-called “inflation expectations” are self-fulfilling: If people expect prices to continue to rise sharply, they often take steps, such as demanding higher wages, which can lead to persistently high inflation.

On Monday, the New York Fed said consumers now expect inflation to be 5% next year. That was the lowest forecast in nearly 18 months. Over the next five years, consumers expect inflation to average 2.4%, just above the Fed’s 2% target.

Still, Fed officials have emphasized in speeches in recent weeks that they intend to raise the benchmark short-term rate by another three-quarters of a basis point to just above 5 percent in the coming months. The increase will come after seven rate hikes last year that nearly doubled mortgage rates and made auto loans and business borrowing more expensive.

Futures prices suggest investors expect the central bank to be less aggressive, with just two quarter-point rate hikes through March, bringing the Fed’s rate just below 5%. Investors also expect the Fed to cut interest rates in November and December, according to the CME FedWatch tool.

Federal Reserve Chairman Jerome Powell has sought to push back against expectations of fewer rate hikes this spring and rate cuts by the end of the year, which could make the Fed’s job harder if investors bid up stock prices and lower bond yields. Both trends could support faster economic growth just as the Fed tries to cool the economy.

The minutes of the Fed’s December meeting noted that none of the 19 policymakers expected to cut rates this year.

Still, St. Louis Fed President James Bullard expressed optimism last week that “actual inflation is likely to follow inflation expectations to lower levels” this year, suggesting 2023 could be a “deflationary year.” (Associated Press)

(This is an unedited and auto-generated story from a Syndicated News feed, the body of content may not have been modified or edited by LatestLY staff)