The Fed’s preferred inflation indicator has dropped to 5.5%

The Fed’s preferred inflation indicator has dropped to 5.5%

Inflation as measured by a metric frequently monitored by the Federal Reserve decreased this month, providing further evidence that a prolonged rise in consumer prices appears to be abating.

The Commerce Department said on Friday that prices grew 5.5% year-over-year in November, down from a revised 6.1% increase in October and the weakest increase since October 2021. Excluding volatile food and energy prices, so-called core inflation rose 4.7% year-over-year. Additionally, this was the smallest increase since October 2021.

Prices increased 0.1% from October to November, following a 0.4% increase the prior month. Core prices rose 0.2%.

Inflation, which began rising a year and a half ago as the economy recovered from the coronavirus recession of 2020, continues substantially over the Fed’s desired annual growth rate of 2%.

“From the standpoint of the Federal Reserve, the economy is going in the right direction toward the end of 2022, but not quickly enough. Chief Economist of PNC, Gus Faucher, stated in a research note that higher interest rates are hurting on consumer expenditure, especially for durable items, and that inflation is decreasing.

Since March, the central bank has hiked its benchmark interest rate seven times in an effort to rein in inflation.

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Higher prices and interest rates may have a negative impact on American consumers. Their expenditure increased by only 0.1% from October to November, and did not increase at all after correcting for inflation.

Rubeela Farooqi, senior U.S. economist at High Frequency Economics, wrote in a research note, “We anticipate a slowdown in household expenditure when the Fed raises rates further in 2023.”

Nevertheless, Americans’ after-tax income increased 0.3% in November, even after adjusting for inflation.

The Fed is said to follow the personal consumption expenditures price index, which was released by the Commerce Department on Friday, much more attentively than it does the better-known consumer price index by the Labor Department. November’s year-over-year CPI increase of 7.1% was less than June’s 9.1% year-over-year increase, which was the largest such increase in four decades.

PCE tends to demonstrate a lower inflation rate than CPI. In part, this is due to the fact that rents, which have skyrocketed, carry double the weight in the CPI compared to the PCE.

When inflation spikes, the PCE price index also attempts to account for changes in shopping behavior. Thus, it can detect, for instance, when consumers transfer from expensive national brands to less expensive retail brands.

 

»The Fed’s preferred inflation indicator has dropped to 5.5%«

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