President Joe Biden’s reelection campaign would benefit from the Federal Reserve’s favored inflation index, which further softened last month despite ongoing economic growth.
Friday’s government report indicated a modest 0.2% increase in prices from November to December, aligning closely with pre-pandemic levels and just above the Fed’s 2% annual target. Over the year, prices saw a 2.6% uptick.
When excluding volatile food and energy costs, core prices exhibited a mere 0.2% monthly rise and a 2.9% increase from the previous year, marking the smallest such increase since March 2021. Economists tend to view core prices as a more reliable indicator of inflation trends.
These figures suggest the economy is navigating a delicate soft landing, with inflation easing back toward the Fed’s target without precipitating a recession. Such a scenario may pave the way for the Fed to contemplate reducing its key interest rate, which has been raised 11 times since March 2022 to combat inflation.
The surge in interest rates has restrained consumer spending on big-ticket items like homes and cars by inflating borrowing costs, while businesses have also felt the pinch.
Political Criticism Over Inflation Surge
A separate government report released Thursday revealed a robust 3.3% annual growth rate in the economy’s final quarter of last year, propelled by resilient consumer spending. This marked a notable turnaround from early expectations of an impending recession, culminating in a 2.5% growth rate for 2023, up from 1.9% in 2022.
Critics of President Biden, particularly from the Republican camp, have highlighted the significant inflation surge witnessed over the past year, largely attributing it to his administration’s spending policies.
However, with inflation now sharply receding alongside a resurgence in consumer confidence, sentiments about the economy are beginning to brighten.
Key details from Friday’s report underscored the contained nature of inflation: Over the past six months, prices have risen by a modest 1.9%, below the Fed’s 2% target, while the figure dips further to 1.5% over the last three months. Notably, grocery prices remained stable in December, with a slight increase of 1.3% compared to a year earlier.
Looking ahead, all eyes are on the upcoming Fed policy meeting, where Chair Jerome Powell’s remarks will be closely scrutinized for hints on potential interest rate cuts.
Economists like Lydia Boussour from consulting firm EY anticipate the Fed to initiate rate cuts in the coming months, as inflation appears to be on a steady trajectory back to the central bank’s target. However, some Fed officials caution against rushing such decisions, advocating for a cautious and calibrated approach.
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