This week’s Consumer Price Index (CPI) data revealed a third, consecutive month of moderating prices as the cumulative effects of 425 basis points of monetary policy tightening have adjusted the trajectory of inflation to what appears to be a discernable path towards the FOMC’s 2% stated target, a requisite condition to hasten the end of the most aggressive monetary policy tightening in over 40 years. While inflation aggregates still remain elevated, with little relief observed in shelter, food and wages thus far, the transition away from more costly goods to services spending is well underway and has served to slow recent run-rates in Core CPI (Headline less food and energy), with a three-month annualized rate of 3.1% as of December 2022 (versus 6.0% in Sept. 2022), along with a six-month annualized rate of 4.55% (versus 6.9% in Sept. 2022) on the same basis. While this
is welcome news for the FOMC and investors alike, there are surely risks of reacceleration in the months ahead, particularly in energy and medical care costs, which have driven the bulk of cooling in inflation aggregates over the past three months. Additionally, chronically tight labor markets remain a problem for the Federal Reserve and employers, as compensation costs (wages +) have been much slower to moderate and, given the five-decade low in the unemployment rate (3.5%; Dec.) and elevated JOLTS job openings (10.5 million; Nov.), will likely take an extended period of time to achieve a more favorable, downward trajectory, the main driver of the FOMC’s assertion that the Federal Funds rate will be maintained at its terminal level (near 5%) for the balance of 2023.
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