Economy

U.S. Inflation Cools Again Giving Fed Room to Slow Rate Hikes

ChainVerse December 26, 2024

U.S. Inflation Continues to Slow in December, Giving Fed Room to Slow Rate Hikes

The latest data on U.S. inflation has provided further evidence that price pressures have peaked, and this could give the Federal Reserve room to slow the pace of interest-rate hikes next month.

Inflation Cooling Down

Excluding food and energy, the consumer price index (CPI) rose 0.3 per cent last month and was up 5.7 per cent from a year earlier, according to a Labor Department report released on Thursday. Economists see the core CPI as a better indicator of underlying inflation than the headline measure.

A Better Indicator

The core CPI is considered a more reliable gauge of inflation because it excludes volatile components like food and energy prices. This makes it a better indicator of the underlying trend in inflation, which can be influenced by factors such as changes in supply and demand.

Inflation Peaking?

The slowing pace of inflation has been a consistent theme over the past few months. The overall CPI fell 0.1 per cent from the prior month, with cheaper energy costs contributing to the decline. This is the first time since June 2022 that the CPI has fallen, and it suggests that inflation may have peaked.

A Possible Shift in Fed Policy

The data could give the Federal Reserve room to slow the pace of interest-rate hikes next month. The central bank’s next meeting ends on February 1, and there is speculation that they may downshift to a quarter-point hike instead of the usual half-point increase.

Why the Fed May Pause

The Fed has been tightening monetary policy aggressively over the past year in an effort to control inflation. However, with inflation showing signs of slowing, some economists are now speculating that the central bank may pause its rate hikes or even cut rates later this year.

A Tight Labor Market and Resilient Demand

However, there are still concerns about inflation, particularly in areas such as services, where prices have been rising strongly. A tight labor market and resilient consumer demand also threaten to keep upward pressure on prices.

What’s Next for the Fed?

Despite the slowing pace of inflation, the Fed is expected to raise interest rates further before pausing to assess how their tightening cycle is impacting the economy. Policymakers have emphasized the need to hold rates at an elevated level for quite some time and cautioned against underestimating their will to do so.

Market Expectations

Investors are still betting that the central bank will cut rates by year end, despite officials saying otherwise. With assistance from Matthew Boesler, Chris Middleton, and Sydney Maki, Bloomberg.com provides insight into what’s next for the Fed and the economy.

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