Summary
The Consumer Price Index rose by 3.1% in the period from November, compared to 3.2% in October, as inflation continues to decline. A decrease in inflation means that prices are not rising too quickly, not that prices are actually falling for most things. Price stability raises the chances of avoiding the economy slipping into a recession despite the Federal Reserve’s campaign to raise interest rates to combat inflation with the aim of slowing down the economy. With inflation easing, it may be possible for the central bank to roll back its interest rate hike campaign earlier instead.
Inflation Declined in November with Falling Fuel Prices
Inflation continued to decline in November, helping to improve household budgets that have been pressured by a sharp increase in prices in recent years.
The Labor Department reported on Tuesday that the Consumer Price Index, a widely followed measure of living costs, rose by 0.1% in November compared to October, after being flat the previous month. A 6% drop in fuel prices during the month offset increases in rental, food, auto insurance, medicine, and some other costs. Over the 12 months up to November, the Consumer Price Index increased by 3.1%, compared to 3.2% in October and more than a third of the annual increase of 9.1% in June 2022, which was the highest since the early 1980s.
The report was the latest evidence that inflation is on a downward path while the labor market remains relatively favorable for workers, raising the chances that the economy achieves a “soft landing” from the recent high wave of inflation rather than the economic collapse many experts predicted last year.
The report also showed that there are some upward pressures on prices. Core inflation, which excludes food and fuel, rose by 4% over the year, the same rate as October, mainly due to housing costs.
Stock futures rose immediately after the report was released before falling back. The inflation numbers were in line with expectations, according to a survey conducted by Dow Jones Newswires and The Wall Street Journal.
Between March 2022 and July, the Federal Reserve raised the benchmark interest rate to a 22-year high and maintained it there, raising borrowing costs on all types of loans taken by individuals and businesses, aiming to dent spending and allow supply and demand to rebalance. The Federal Reserve aims to reduce inflation to an annual rate of 2% and keep it there.
If this is achieved without a recession, it’s much better — a possibility acknowledged by Federal Reserve officials in their public statements despite the historical record showing that this is extremely rare, as eight out of nine interest rate hike campaigns have led to economic contraction.
The central bank is widely expected to keep the benchmark interest rate steady when it announces its policy decision on Wednesday, and this inflation report did not change that view among financial market participants. The likelihood that the Federal Reserve will hold the interest rate steady in its current range of 5.25% to 5.5% is based on the CME Group’s FedWatch tool, which predicts Federal Reserve benchmark interest rate increases based on futures trading data for federal funds.
Wednesday’s meeting may also provide hints about when the Federal Reserve will decide that inflation is under control enough to begin cutting the federal funds rate, thus reducing the pressure that has driven up interest rates on mortgages, auto loans, and other credit.
contributed
The drop in fuel prices is contributing to a decline in inflation. The average price of regular gas has reached $3.14 across the United States, a decrease of about 70 cents from August, according to AAA. Crude oil prices, which are used to make gasoline, have sharply declined this fall due to concerns about slowing economic growth in countries outside the United States that may lead to reduced demand.
Although inflation has lost much of its strength over the past year and a half, consumers are still grappling with food, rental, and other necessities at levels much higher than before the pandemic erupted. Economies have seen a decline in inflation – which means that prices are not rising quickly – rather than deflation, which means that prices for many things are actually falling. The Federal Reserve aims for the former and is trying to avoid the latter, as Raphael Bostic, President of the Federal Reserve Bank of Atlanta, pointed out in an article published late last month.
“Inflation might seem appealing. After all, who wouldn’t want to pay less for groceries next week?” he wrote. “But it can be economically destructive. Consumers may delay purchases because they expect prices to continue to drop. This can lead to a reduction in overall consumption, causing businesses to cut production, which means lower profits, cutting costs, and layoffs.”
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Source: https://www.investopedia.com/inflation-simmered-down-in-november-as-gas-prices-fell-8414414
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