In recent months, there have been worrying signs of rising inflation in the U.S., and this bubble could burst before next spring.
The recent rise in inflation has indeed been surprising. Consumer prices and producer prices have rebounded after a stable slowdown in the spring and summer of last year. However, the latest price report seems to indicate that this increase may be temporary.
The most widely known measure of U.S. inflation—the Consumer Price Index (CPI)—rose to 2.7% in the year ending in November, up from 2.4% two months ago, the lowest point in three and a half years. Producer prices also increased, and the Federal Reserve's preferred inflation measure—the Personal Consumption Expenditures (PCE) price index—is expected to rise from 2.1% a few months ago to 2.5% in November.
In short, inflation is deviating from the Federal Reserve's long-set target of 2%, meaning the Federal Reserve will not be able to lower interest rates as quickly as high-level officials previously hinted, disappointing homebuyers and others hoping for lower borrowing costs.
However, the Federal Reserve still expects to lower interest rates this week, and it is more likely to take a 'pause' early next year.
Why is this happening? Most Federal Reserve officials believe inflation will decline again in the new year. EY Parthenon Chief Economist Gregory Daco noted that Federal Reserve Chairman Powell is pursuing a 'forward-looking inflation assessment approach.'
Powell may be right.
Despite the acceleration in price growth in the fall, three major inflation drivers are expected to show signs of easing in the coming months: housing costs, service prices, and labor costs.
The biggest factor is housing, which is the largest expense for most households and a major source of high inflation over the past two years. Federal Reserve officials and Wall Street economists have long anticipated that housing costs would cool down and help bring inflation back to pre-pandemic low levels. They saw clear signs of this in November. Rent and home price indicators in the CPI recorded the smallest increases since 2021.
Next is the service sector—such as restaurants, healthcare providers, and entertainment venues. This is also a source of stickiness in U.S. inflation. Since the summer, costs in the service sector have eased significantly. 'As the New Year approaches, the trend of price pressures is clearly moving in a better direction,' said Kurt Rankin, a senior economist at PNC Financial Services. Part of the reason for the slowdown in service sector inflation is that consumers are unwilling to pay higher prices unless businesses freeze or lower their prices.
For instance, the CEO of Target stated that shoppers have become more selective and are waiting for deals before making purchases. The Federal Reserve's economic survey report (Beige Book) also noted that consumers are refusing to accept higher prices. The report stated, 'Many businesses have observed an increased price sensitivity among consumers.'
For service companies, the largest expense is labor. Labor costs also show signs of further easing. For example, unit labor costs grew only 0.8% in the third quarter, according to revised government data. These costs are leading indicators of future inflation.
Federal Reserve officials state that labor is not the main source of inflation, but if these costs remain moderate, economists believe this will help combat inflation. 'Slowing wage growth and a loosening labor market are clear evidence of easing the high-level drivers of service inflation,' wrote economists at Citigroup in a report to clients.
Supporters of low inflation expect the inflation rate measured by PCE to slow to 2% or slightly above by mid-next year. However, a significant number of economists believe inflation will remain above the Federal Reserve's target.
The inflation path for the second half of 2025 may depend on some uncertain factors, such as the tough tariffs and immigration policies of President Trump.
Article reposted from: Jinshi Data