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The Key Takeaways
- The Consumer Price Index (CPI) released earlier this month showed that inflation as measured by Personal Consumption Spending likely increased in November.
- The Fed may be compelled to increase interest rates if inflation persists.
- Some economists are concerned about the rising risks associated with high inflation, even though some of the details in the report may be more positive, like the rate of inflation for the month.
The Federal Reserve’s preferred inflation measure was flirting with the bank’s target of a 2 percent annual rate not long ago. It was heading the wrong way in November.
The Bureau of Economic Analysis will release a report on Friday that is likely to indicate the rise in the cost of living in November as measured by the Personal Consumption Expenditures. The increase was 2.5% compared to a 2.3% in October.
It would be similar to the increase in inflation as seen by a separate measure released this month, the Consumer Price Index. The Federal Reserve pays more attention to PCE in determining the country’s monetary policies. The report on Friday could therefore have an even greater impact on future borrowing costs and the key interest rate of the Federal Reserve.
Core inflation (excluding volatile prices of food and fuel) is expected to rise 2.9% this year. It was 2.8% last October. Because food and gasoline prices fluctuate for reasons unrelated to inflation, policymakers focus more on the readings of core indicators.
Has The Federal Reserve's Progress on Inflation Stalled?
The rate of inflation has been falling for the majority of this year. However, it has stagnated in recent months. Inflation readings that are higher could lead to officials at the Federal Reserve keeping interest rates high for longer. This would increase borrowing costs for credit cards, auto loan, and any other type of credit.
For more than a decade, the Fed kept its rate of interest at an all-time high to increase borrowing costs, deter spending and combat inflation. Fed officials have cut rates in November and September after several good inflation reports. They are also expected to cut it again next week.
Inflation could continue to rise next year, resulting in a few rate reductions.
“With a strong economy, diminished downside risks to the labor market, and evidence that inflation is stickier than anticipated, the Fed will not be in a rush to get to a highly uncertain neutral level,” wrote Deutsche Bank analysts Monday.
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