November’s inflation data confirmed what economists had expected: Inflation may have increased sharply, providing relief from the highest cost of living increase in more than 40 years. That topped the latest consumer price index reading on Tuesday. A broad basket of goods and services showed prices rose by 0.1% last month, representing a 7.1% increase from a year ago. While inflation remains unusually high, there is broad agreement that peak inflation has passed. “Inflation was terrible in 2022, but the outlook for 2023 is much better,” said Bill Adams, chief economist at Comerica. “Supply chains are working better, inventories are higher, eliminating shortages that have fueled inflation in 2020. Energy inflation has eased in recent months, and food prices are slightly lower in November, too.” Well, the soft CPI reading came as a result of a wide range of costs either falling or slowing. Energy prices fell by 1.6% for starters. Used vehicle prices, the main driver of inflation in this cycle, fell by 2.9%. Bacon was down 1.8%, seafood was down 1.4% and airfare was down 3%. And workers finally got a break, with inflation-adjusted average hourly wages up 0.5% this month, despite falling nearly 2% last year. There is also hope that political power can help lower inflation. If China continues to reopen and moves away from its zero-Covid policy, that should provide a devastating impact. What happens from here, however, is the hard part. The way ‘related’ to the Federal Reserve’s series of interest rate hikes – six in total, taking the benchmark short-term lending benchmark of 3.75 percent points, and others to come – will really pass through the economy. Central bank officials like to say that monetary policy adjustments occur “long and variable lags” that usually do not set at least a year. After all, the only sector where interest rate hikes seem to be hitting so far is housing. So with more policy tightening still on the way, the mild inflation that accompanies recession is yet to come. Critics of the Fed worry that rate hikes could go too far and could be too hard on the economy once inflation ends. “The inflation slowdown appears to be driven more by post-pandemic normality (finally) playing out than 425 looks like. [basis points] rate hikes (including a 50 bps hike in the morning) the Fed has started,” wrote Josh Jamner, chief investment strategist at ClearBridge Investments. We’re heading into 2023 and the economy appears to be slowing on its own, which lends higher recession risks to the outlook. our next year.” Economists also generally agree that a recession is likely to come next year. Most show an expected decline. It is believed that the Atlanta Fed is tracking GDP growth in the fourth quarter at 3.2%, which would be the best in a year. The Fed’s 95 billion dollars per month to reduce bond holds. So as inflation decreases and the economy cools, there is reason to warn that this year’s “shallow” could be equal to the announcement of 2021. “There is a significant risk that monetary policy will be too restrictive in the face of inflation to normalize,” the PNC chief said. economist Kurt Rankin. “But it’s a risk that the Fed is clearly willing to take because any inflation that isn’t fully released could cause more damage to the US economy than the PNC’s view of a recession.” If the economy softens more than expected in 2023, that signals another problem for the Fed. If the recession turns out to be severe and last longer than expected, markets and politicians may put pressure on the Fed to start easing again. “We’re probably on our way to 2% inflation because of the recession next year,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “In this time of transparency and politics, I don’t think calls for them to start easy if the economy is good next year. The Fed ends its two-day policy meeting on Wednesday, with markets widely expecting a 0.5 percent increase in the federal funds rate. That would take the benchmark for short-term lending to a target range of 4.25%-4.5%, the highest in more than 15 years. However, following the CPI report traders are pricing in the “end rate,” or the final point of the Fed’s rate hike. The market now expects the central bank to hike to around 4.84% before stopping, down from 5%.
