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Is This Finally the Price Decline We've Wanted to See?



A key economic indicator that the Fed uses to determine whether interest rates should rise or fall rose 2.4 percent over the past 12 months. That is the smallest increase in about two years, a positive step toward the Fed’s goal of 2 percent inflation, right?


It’s more complicated than that. There’s significant improvement if you look at the longer term. That same indicator found 4.7 percent inflation in January 2023. However, comparing December 2023 to January 2024, the indicator increased 0.4 percent. That was the largest monthly increase in a year.  


Overall, Americans are earning more. They are spending less. The prices of goods are declining but services are going up. Food is more expensive. Energy is cheaper.


The bottom line is what is happening compared to a year ago looks better than what is happening compared to a month ago.  


Those are all according to the latest statistics from the U.S. Chamber of Commerce Bureau of Economic Analysis.  


Personal Consumption Expenditures Price Index
Source: U.S. Chamber of Commerce Bureau of Economic Analysis


The search for declining interest rates could stretch toward this summer.


“We can still be on the path to two percent inflation even with some monthly waggles or a modest increase from the surprisingly low levels of the last half of the year.”    


Those were the words before the Council on Foreign Relations by Austan Goolsbee, president and CEO of the Federal Reserve Bank of Chicago on February 14th. That Valentine’s Day message wasn’t as painful as your significant other forgetting you on that special day. But it’s also not as comforting as one of those jumbo boxes of dark chocolate truffles.  


Goolsbee also added this context about what has been happening: “Over the past seven months core PCE inflation has been running at the Federal Reserve’s 2 percent target or even below. Rate cuts should be tied to confidence in being on a path toward the target. I don’t support waiting until inflation on a 12-month basis has already achieved 2 percent to begin to cut rates.”


PCE—Personal Consumption Expenditure Price Index     


“A measure of consumer spending on goods and services among households in the U.S. The PCE is used as a mechanism to gauge how much earned income of households is being spent on current consumption for various goods and services.”


Core PCE – Core Personal Consumption Expenditure Price Index 


Excludes prices for food and energy (those can be “volatile” as the Commerce Department describes them).

--Bureau of Labor Statistics


Goolsbee sees strength in the economy with supply chain problems that erupted after COVID-19’s arrival largely disappeared, productivity growth is higher than expected, and the economy has avoided recession.


Goolsbee said, “Nearly every serious reduction in very high inflation until now has come with a deep recession, in the United States and elsewhere. Yet in 2023, inflation -- according to the Price Index for Personal Consumption Expenditures -- was down about three percentage points from a year earlier…one of the biggest drops in 50 years…with GDP growth remaining strong and the unemployment rate holding steady at well below four percent.”


But housing costs continue to put upward pressure on PCE.


Over the past six months the news on goods’ prices has been especially favorable and even inflation in PCE services not including housing has made good progress. But over the past few months the deceleration in housing services inflation has not been as fast as expected,” Goolsbee said.


“Deceleration” is like the euphemistic way auto dealers now call used cars “pre-owned” instead. In the economy’s case, deceleration (i.e., higher prices) in the housing sector is an additional force on overall costs.  


“Hot January inflation data adds to uncertainty and pushes back rate cut expectations,” David Alcaly, lead macroeconomic strategist at Lazard Asset Management, told CNBC.


A Barron’s report looks ahead to the next monthly federal report and what happens if it echoes January’s upward price push. “If the February inflation reports continue to show price growth accelerating, that could combine with the more positive recent data and persuade the Fed to wait longer to cut interest rates. It could even raise concerns that central bank officials might actually have to reverse course and hike,” the article stated. 


CME FedWatch Tool tracks the prices of fed funds futures contracts and then estimates the likelihood that the Fed will change borrowing rates.


It isn’t expecting rate increases soon. But rate cuts? Not March. Not May. June’s meeting is more likely for the Fed to reduce rates, according to the CME FedWatch Tool.


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