The US inflation report could show further deceleration in price spikes

Gas prices have fallen from their mid-summer highs and supply chain issues are resolving, helping to drive down the cost of imported goods and parts.

WASHINGTON — A high-profile report on inflation due to be released Tuesday morning could show that another month of refrigerated prices and show that the pressure on American budgets is gradually easing.

A softer inflation report would also fuel optimism that the Federal Reserve will suspend inflation rate hikes sometime early next year.

According to data provider FactSet, economists are forecasting consumer prices to have risen 7.3% year-on-year in November. While still uncomfortably high, this would fall well below the recent peak of 9.1% in June and mark the fifth straight yoy slowdown in inflation.

Gas prices have fallen from their mid-summer highs and are lower than a year ago. Many Supply chains have unraveled, reducing the cost of imported goods and parts. The prices for wood, copper, wheat and other raw materials have also fallen.

Fed officials and economists will focus more on Tuesday’s monthly inflation reading for a better read of where prices may be headed. Prices are expected to have risen 0.3% from October to November, which would extend a series of slowdowns. On a month-to-month basis, inflation rose 1% in May and 1.3% in June, but has averaged just 0.2% over the past four months.

For some economists and Fed officials, such numbers are a sign of improvement, even as inflation is well above the central bank’s annual target of 2% and may not reach it until 2024.

Fed Chairman Jerome Powell has said that he follows price trends classified into three different categories to best understand the likely course of inflation: goods, excluding volatile food and energy costs; housing, which includes renting and the cost of home ownership; and non-residential services, such as auto insurance, pet services and education.

In a speech two weeks ago in Washington, Powell noted that there had been some progress in reducing inflation in goods and housing, but not in most services. Material goods such as used cars, furniture, clothing and electronic devices have steadily become cheaper since the summer.

Used car prices, which had skyrocketed 45% year-on-year in June 2021, have mostly fallen this year. In October, their year-on-year price increase was only 2%.

Housing costs, which account for almost a third of the consumer price index, continue to rise. But real-time measurements of apartment rents and home prices are beginning to fall after showing rapid price acceleration at the height of the pandemic. Powell said those declines are likely to show up in government data next year and should help bring headline inflation down.

Still, service costs are likely to remain elevated, Powell suggested. This is partly due to steep climbs wages are becoming a major driver of inflation. Service businesses such as hotels and restaurants are particularly labor intensive. And with average wages growing at 5-6% annually, price pressures in this sector of the economy continue to build.

Service companies tend to pass some of their higher labor costs on to their customers by charging higher fees, thereby perpetuating inflation. Higher wages also drive more consumer spending, which allows companies to raise prices.

“We want wages to rise sharply,” Powell said, “but they need to rise at a level that is consistent with 2% inflation over time.”

On Wednesday, the Fed is likely to hike rates for the seventh time this year, a move that will further increase the cost of borrowing for consumers and businesses. Still, the central bank is expected to hike its short-term interest rate by a smaller half-point after raising it by three quarters of a point four times in a row. That would put the policy rate in a range of 3.75% to 4%, its highest level in 15 years.

Economists expect the Fed to slow further rate hikes next year, with hikes of a quarter point in February and March if inflation remains relatively subdued. The US inflation report could show further deceleration in price spikes

Laura Coffey

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