December Sees Further Inflation Slowdown Amidst Growing ‘Soft Landing’ Focus

(Source-The-National-Herald)

In a report released on Friday, the U.S. government revealed that the Federal Reserve’s preferred inflation measure experienced a further cooling trend in the previous month. This decline in inflation comes amid a robust and continuing economic expansion, a development likely to be well-received at the White House, especially as President Joe Biden gears up for re-election. The delicate balance between economic growth and inflation is becoming a pivotal factor in shaping the narrative of Biden’s economic stewardship.

Modest Price Increases and Core Inflation

The report indicated a mere 0.2% rise in prices from November to December, a pace reminiscent of pre-pandemic levels and just slightly above the Federal Reserve’s 2% annual target. When measured against the previous year, prices exhibited a modest 2.6% increase. Notably, when excluding volatile food and energy costs, often termed “core” prices, the rise was also 0.2% from month to month and 2.9% from the previous year. This marks the smallest increase in core prices since March 2021. Economists often consider core prices as a more reliable indicator of the inflation trajectory.

Navigating a Potential Soft Landing

The latest data hints at the possibility of the U.S. economy achieving a sought-after “soft landing.” In this scenario, inflation retreats to the Federal Reserve’s target without triggering a recession. Such an outcome could pave the way for the Federal Reserve to contemplate a reduction in its key interest rate. The interest rate has seen 11 increases since March 2022, a measure implemented to combat inflation. The higher interest rates have impacted various sectors, including home sales, where borrowing costs have risen, and businesses, which have grappled with increased borrowing expenses. As the economy shows signs of achieving equilibrium, the delicate dance between inflation control and economic growth takes center stage.

Considerations for the Federal Reserve and Economic Implications

The evolving economic landscape, marked by moderate inflation and sustained growth, offers a prospect of what economists term a “soft landing.” This scenario, where inflation aligns with the Federal Reserve’s target without triggering a recession, holds significance in monetary policy considerations. The Federal Reserve’s ability to mull over a potential reduction in its key interest rate becomes more plausible as inflation trends lower. The central bank, having raised interest rates 11 times since March 2022 to counter inflation, now faces the delicate task of finding equilibrium. A potential reduction in interest rates could alleviate challenges faced by sectors like home sales and businesses contending with heightened borrowing costs.