CU Economists See ‘Welcome Indication,’ Potential Fed ‘Pivot’ in Latest CPI Numbers; Eyes Now Turn to the Fed

01/12/2023 CUToday

WASHINGTON–Inflation continued to slow on an annual basis in December, according to the latest Consumer Price Index (CPI) numbers. The 6.5% increase in CPI during December is a “welcoming sign,” according to one credit union economist, with another saying he expects the Fed to be less aggressive in raising rates.

Noah Yosef

The latest increase is down from the 7.1% increase reported in November 2022 and is an indicator aggressive steps by the Fed to cool the economy by raising rates is having its desired effect. The annual inflation rate was the slowest since October 2021, a pullback that came a gas prices decreased and airfare declined.

Meanwhile, the so-called core inflation measure, which removes food and fuel prices to get a sense of underlying price trends, climbed 5.7% in December from a year earlier, compared with 6% previously.

‘Welcome Indication’

“Alongside weakened wage growth and tapering inflation expectations, December’s CPI readings are another welcome indication of cooling inflation,” said NAFCU Economist Noah Yosef. “While these datapoints should persuade a deceleration in the current tightening cycle, commencing with a reduced interest rate hike this January, they do not likely constitute the compelling evidence required for the FOMC to consider an early termination to the cycle at this junction.”

Added CUNA Economist Mike Schenk,  “Inflation pressures eased significantly in December – greatly boosting the odds that the Federal Reserve will pivot from its current aggressive policy stance. On a monthly basis, consumer prices fell 0.1%, the first decline since May 2020. On a year-over-year basis headline, CPI increased 6.5% and Core CPI (excluding volatile food and energy prices) was up 5.7%.

“Headline price increases are at their lowest level in over a year and are substantially down from both the 9% June 2022 cyclical peak and from November’s 7.1% increase. While declining gasoline prices were the biggest contributor to December’s improvement in price increases broadly measured, the trend in core price changes also reflects moderation,” Schenk continued.

‘Above Comfort Zone,’ But…

Mike Schenk

“Inflation remains well above the Federal Reserve’s comfort zone, but price changes are trending in the right direction and most benchmark indicators – including a cooling labor market and softer wage growth data from the latest jobs report – suggest a continuation of the current trajectory. Importantly, business inflation expectations also remain on a broad declining trend,” Schenk said. “The Fed next meets at the end of January – and against this backdrop, it seems likely that any additional tightening will be more measured and modest. If so, that’s good news for borrowers – and for the economy as a whole."

Eyes will now turn to the Federal Reserve to see how it agrees with the views of the credit union economists and whether it will continue to push up rates. The Federal Open Market Committee is scheduled to next meet in February.

“I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, said in a speech. “In my view, hikes of 25 basis points will be appropriate going forward.”

Climbing Rental Costs

One factor that continues to fuel inflation is climbing rental costs, although analysts have said they expect that trend to reverse by mid-2023.

“But Fed officials are closely watching what is happening with prices for other services, which include things like hotel rooms, sporting event tickets and health care,” noted the New York Times. “They worry that services inflation — which is unusually rapid — could keep prices increasing faster than the central bank’s target. The Fed aims for 2% inflation on average, using a price measure that is different from but related to the Consumer Price Index.”

Federal Reserve Chairman Jerome Powell has also expressed concerns over increases in labor costs.