January 1, Inflation Plummets To 3.1% — And What It Means For You

Inflation dropped to 3.1% for the year ending in November, according to the Bureau of Labor Statistics. This decline was largely driven by energy prices, as gas prices plunged and are down nearly 9% on the year. However, “core inflation,” which excludes volatile food and energy prices, held at a 4% annual pace.

Chris Rupkey, the chief economist at FWDBONDS, said, “Inflation isn’t dead, and inflation pressures are not fizzling out. To get inflation down to the 2% target, the Fed needs monthly changes of 0.2%, not the 0.3% November core CPI reading the markets got today.”

The drop in headline inflation is welcome news for President Joe Biden, who has been touting the declines in inflation alongside the strong labor market as “Bidenomics” at work. It is also good news for the Fed, which has worked to drive down inflation since March 2022 by hiking interest rates as part of its historic tightening cycle. Tuesday’s report likely won’t change the general consensus that the Fed is done raising rates and will begin lowering them next year.

Annual inflation peaked at about 9% in June 2022, and while it is now much lower than it was, price growth is running higher than the Fed’s preferred 2% level. Inflation has been caused by factors on both the supply and demand sides of the equation. Republicans have placed blame on the rash of stimulus spending amid the pandemic coupled with ultra-low interest rates. Democrats have noted the role played by supply-chain problems and argued that inflation has increased in most Western countries and not just the United States.

There has recently been a renewed sense of hope that the Fed will be able to pull off a “soft landing” — that is, a scenario in which inflation meaningfully falls back to a healthy level while the broader economy avoids a recession.

The labor market has particularly remained strong despite the high-interest rate environment. The economy once again beat expectations in November and added nearly 200,000 more jobs, and the unemployment rate dropped slightly to 3.7%, which is considered a healthy level by historical standards.

Gross domestic product growth is seen as the key indicator of recessions. Two quarters of negative GDP growth is typically used as a rule of thumb that the economy has entered a recession, but rather than slowing, the pace of GDP growth has picked up this year. A revision to the third-quarter GDP projections released last month showed that economic growth expanded at a 5.2% seasonally adjusted annual rate in the third quarter of this year, the strongest growth since the pandemic rebound and, before that, 2014.

Interest rates for mortgages and loans have begun moderating in recent weeks as investors bet that the Fed will begin chopping rates sooner than anticipated.

Brad McMillan, the chief investment officer for Commonwealth Financial Network, said, “The U.S. economy continues to chug along and is still headed for a soft landing. Interest rates have largely normalized, and markets are following suit. People are feeling better as they can get good jobs at good wages — and then go shopping. That is a good place to be as we enter the holiday season.”

However, despite the underlying strength of the economy and jobs market, consumers are reporting that the economy is in bad shape. Prices for everything from groceries to gasoline remain much higher than before the pandemic took hold, making life less affordable and translating into economic dissatisfaction.

The housing market has also taken a hit, given that mortgage rates remain quite high and housing prices haven’t significantly dropped in tandem with the higher mortgage rates.

Why It Matters (op-ed)

Inflation’s drop to 3.1% in November is a positive development, but it’s crucial to remember the bigger picture. Core inflation remains at a 4% annual pace, indicating that underlying pressures persist.

The Biden administration may celebrate this as a victory for “Bidenomics,” but let’s not overlook the fact that inflation is still higher than the Fed’s preferred 2% level. Republicans point to unprecedented stimulus spending and low-interest rates as key drivers, while Democrats highlight global supply-chain issues.

The prospect of a “soft landing” for the economy is promising, but we must remain vigilant. With consumers feeling the pinch from high prices and economic dissatisfaction, it’s crucial to address these underlying issues to ensure long-term stability and growth.

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