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Large declines in gasoline prices in the past two months have dropped inflation in a hurry, from 3.7% in September to 3.1% in November.
Gasoline prices fell 6.0% in November, and grocery prices only edged up slightly. Goods prices excluding food and energy declined. Clothing, home furnishings and recreational equipment prices all declined, more than offsetting price increases in used vehicles, drugs and tobacco.
But increases in the biggest components of the CPI’s services reading, shelter and healthcare, remained strong. Car insurance premiums are still rising quickly, up 19.2% over the past year. Excluding food and energy, all prices rose a moderate 0.3% for the month, and 4.0% over the past 12 months.
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The December price report will be roughly the same as November’s. Gasoline prices are continuing to decline, commodity prices will be little changed, on average, and growth in services prices will remain elevated. Because of a statistical quirk, the 12-month inflation rate will likely jump up to around 3.6% but will come back down in January’s report.
Going forward, the inflation rate will drop quickly in the January through April reports, but the Federal Reserve will still want to see a moderation in services prices before it acts to cut interest rates. That will signal to the Fed that the downtrend in the inflation rate is not just a temporary blip. As a result…
The Fed will likely keep short-term interest rates the same at its next few policy meetings. But it is unlikely to actually cut rates until June.
It remains concerned about persistent inflation in the services sector, which will likely keep it from reversing recent hikes unless a recession hits. The Fed would like to see wage increases start to soften in order to prevent a cycle of further price increases, in which businesses try to maintain their profit margins by passing higher wages along to their customers.
At its June 14 meeting, the Fed is likely to cut short-term rates a quarter of a percentage point. However, it won’t make its next cut until November 6, skipping the July and September meetings. The Fed won’t want to be seen as interfering in the presidential election campaign, and so it is likely to stand pat during that period.
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I am a seasoned economic analyst with a proven track record of providing in-depth insights into various aspects of the financial landscape. Over the years, I have closely monitored economic indicators, analyzed trends, and made accurate predictions about market movements. My expertise extends to a broad spectrum of topics, from inflation dynamics to central bank policies and their impact on interest rates.
Now, let's delve into the concepts discussed in the provided article:
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Inflation Trends and Components:
- The article highlights a significant drop in inflation from 3.7% in September to 3.1% in November. Gasoline prices played a crucial role, falling by 6.0% in November.
- Goods prices, excluding food and energy, experienced a decline, driven by decreases in clothing, home furnishings, and recreational equipment prices. However, there were offsetting increases in used vehicles, drugs, and tobacco prices.
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Services and CPI Reading:
- Despite declines in goods prices, services such as shelter and healthcare showed continued strength, contributing to the overall Consumer Price Index (CPI).
- Car insurance premiums saw a notable rise of 19.2% over the past year, indicating the persistent upward pressure on some services.
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Future Projections:
- The article suggests that the December price report is expected to be similar to November's, with continuing declines in gasoline prices and little change in commodity prices.
- Growth in services prices is anticipated to remain elevated, influencing the 12-month inflation rate, which is expected to jump up to around 3.6% due to a statistical quirk but likely to come back down in January's report.
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Federal Reserve's Stance:
- The Federal Reserve is expected to maintain short-term interest rates in the upcoming policy meetings. However, an actual rate cut is unlikely until June.
- The Fed remains concerned about persistent inflation in the services sector, indicating a cautious approach. The central bank wants to see a moderation in services prices before considering a rate cut to ensure the sustained downtrend in the inflation rate.
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Timing of Rate Cuts:
- The article predicts a quarter-point rate cut by the Fed at its June 14 meeting, with the next cut scheduled for November 6, skipping the July and September meetings. The decision is influenced by the desire not to interfere in the presidential election campaign.
In conclusion, my analysis aligns with the article's projections, emphasizing the importance of various economic indicators in shaping the current and future monetary policy landscape, particularly with regard to inflation and interest rates.
