Inflation ticked up to 3.4% for the year ending in December, an unwelcome development as the Federal Reserve grapples to contain prices.
The data that were reported on Thursday by the Bureau of Labor Statistics in an update to the consumer price index is a bit of bad news for President Joe Biden. The White House has tried to tout reports that show inflation falling, alongside the country’s strong labor market, as “Bidenomics” at work.
It is also unwelcome news for the Fed, which has worked to drive down inflation since March 2022 by hiking interest rates as part of its historic tightening cycle. The increase might raise questions about whether the central bank will truly begin to pivot to cutting soon and might cause some anxiety among investors.
On a month-to-month basis, inflation rose 0.3%, more than expected.
“Core inflation,” which doesn’t include volatile food and energy prices, fell slightly to 3.9% for the year ending in December. Over the past year, core inflation has trended down in a sign that the rate hikes are generally working.
Annual inflation peaked at about 9% in June 2022. While it is now much lower than it was, price growth is still running higher than the Fed’s 2% target.
Inflation has been caused by factors on both the supply and demand sides of the equation. Republicans have placed blame on the rash of stimulus spending amid the pandemic coupled with ultra-low interest rates. Democrats, on the other hand, have tended to highlight the supply-chain problems, and noted that inflation has increased in most Western countries and not just the U.S.
“Net, net, inflation at its core remains hotter than Fed officials would like to see and this in combination with a strong labor market where companies hold on tight to their workers instead of laying them off means the prospects for numerous interest rate cuts this year is not as likely as markets are betting on,” said Chris Rupkey, chief economist at FWDBONDS.
There has recently been a renewed sense of hope that the Fed will be able to pull off a “soft landing,” that is, a scenario in which inflation meaningfully falls back to a healthy level while the broader economy avoids a recession.
While the central bank’s monetary policy committee is now predicting three rate cuts this year, investors are betting that officials will go much further, penciling in some six rate cuts in 2024, according to the CME Group’s FedWatch tool.
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Despite the nearly two years of higher rates, the labor market has remained surprisingly robust, further bolstering hopes of a soft landing.
The economy beat expectations again in December and added 216,000 jobs. Additionally, the unemployment rate remained at 3.7% — low by historical standards.
