US inflation slowed sharply to 7.1% over the past 12 months

Even with the reduction in inflation last month, the Federal Reserve plans to keep raising interest rates. On Wednesday, the Fed will raise its benchmark rate for the seventh time this year, a move that will further increase borrowing costs for consumers and businesses. Economists have warned that by continuing to tighten credit to fight inflation, the Fed is likely to trigger a recession next year.

Tuesday’s government report showed inflation in November slowed as gas, electricity and used cars, among other items, became less expensive.

Several trends have begun to ease price pressures, though they likely won’t be enough to return headline inflation to the levels Americans are used to any time soon.

The national average for a gallon of regular gas has sunk from $5 a gallon in June to $3.26 as of Monday. Many supply chains have also been shortened, helping to reduce the costs of imported products and parts. The prices of lumber, copper, wheat, and other commodities have fallen steadily, which tends to reduce the costs of construction and food.

For some economists and Fed officials, the numbers are a sign of improvement, even though inflation remains well above the central bank’s annual target of 2 percent and may not reach it until 2024.

Fed Chairman Jerome Powell has said he is tracking price trends in three different categories to better understand the likely path of inflation: goods, excluding volatile food and energy costs; housing, which includes rents and the cost of ownership; and non-housing services such as auto insurance, pet services and education.

In a speech two weeks ago in Washington, Powell noted that there had been some progress in reducing inflation in goods and housing, but not so in most services. Physical goods such as used cars, furniture, clothing and appliances have become increasingly less expensive since the summer.

Used car prices, which had soared 45% in June 2021 compared to a year earlier, have been falling for most of this year.

Housing costs, which account for almost a third of the consumer price index, continue to rise. But real-time measures of apartment rents and home prices are starting to fall after posting an acceleration in prices at the height of the pandemic. Powell said those declines will likely show up in government data next year and should help lower overall inflation.

Still, the costs of services are likely to remain consistently high, Powell suggested. In part, this is because strong wage increases are becoming a key driver of inflation. Service businesses, such as hotels and restaurants, are particularly labor intensive. And with average wages growing at a brisk 5%-6% annually, price pressures continue to mount in this sector of the economy.

Service companies tend to pass on some of their higher labor costs to their customers by charging more, thus perpetuating inflation. Higher wages also fuel more consumer spending, allowing companies to raise prices.

“We want wages to rise strongly,” Powell said, “but they have to rise to a level that is consistent with 2 percent inflation over time.”

On Wednesday, the Fed is expected to raise its key short-term rate by half a point, after four consecutive three-quarter point hikes. That would leave its benchmark rate in a range of 3.75% to 4%, its highest level in 15 years.

Economists expect the Fed to further slow rate hikes next year, with quarter-point increases in February and March if inflation remains relatively subdued.

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