A path of slowly decelerating inflation would give investors optimism, but also disappoint Federal Reserve policy makers counting on a faster return to normal
Of all the likely paths forward for U.S. inflation, there’s one with the most potential to catch many traders and investors wrong-footed throughout 2023. It’s a path of not-so-swiftly decelerating price gains, which raises investors’ hopes of further easing in inflation but disappoints Federal Reserve policy makers counting on a faster return to more-normal levels closer to 2%.
Just three days ago, traders and analysts were describing November’s softer-than-expected CPI data, released on Tuesday, as a game-changer that suggested price pressures would ease quickly from here. It didn’t take long for investors and traders to realize such progress wasn’t good enough for the central bank, which hiked its main policy rate again on Wednesday, penciled in borrowing costs of above 5% in 2023, and warned that rates will likely be higher for longer.
“We’re thinking inflation remains sticky for longer than anticipated,” Goldberg said via phone. “A lot of that has to do with core services inflation, which has slowed, but not significantly declined, and the fact that you’ve had a very tight labor market for some time. From our perspective, the consumer is the driver for a lot of inflation due to low unemployment and high excess savings.
Many investors have consistently underestimated the durability of inflation for more than a year, as well as the Fed’s resolve to contain it. While the Fed’s preferred inflation gauge is the personal consumption expenditures index, the central bank also pays attention to the CPI’s annual headline rate — which is still running at some of the highest levels in four decades — because of its impact on household expectations.
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