The Fed’s Preferred Inflation Measure Cooled in June
Inflation has begun gradually moderating in recent months, good news for consumers and for Fed officials, who have been raising interest rates to try to cool the economy and wrestle price increases back under control. Policymakers lifted rates to a 5.25 to 5.5 percent range this week, the highest level since 2001, and signaled that they are open to doing more if incoming data suggest that inflation is likely to last.
Fed policymakers have been closely watching core inflation in particular, because it strips out volatile data to give a better sense of where inflation might be headed. Officials aim for 2 percent inflation on average, so that key price measure is still about twice as fast as their goal.
Still, the recent progress has been a welcome development, especially because the economy has held up even as price increases begin to slow. The resilience has been fueled by consumers, who have continued to spend even as it becomes more expensive to borrow for a car or credit card purchase. Friday’s report showed that personal consumption spending picked up by 0.4 percent in June from the previous month after adjusting for inflation, more than the 0.3 percent that economists had expected.
Slowing inflation and solid economic data have combined to stoke a growing sense of optimism among economists: It seems increasingly possible that the Fed might be able to cool the economy just enough to bring inflation under control without hurting it so much that unemployment spikes and growth contracts sharply. The Fed’s staff even revised its forecast at the central bank’s meeting this week, and is not longer calling for a downturn this year.
Yet policymakers remain watchful, because the same resilience that is encouraging optimism now could lay the groundwork for stubborn inflation later. If companies can continue to raise prices because their customers are in good financial shape and are able and willing to pay more without pulling back, it could keep inflation more rapid than is typical.
Source: The New York Times
