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U.S. Inflation is Slowing but More Rate Hikes Likely. Here’s Why 

June 23, 2023


Inflation is moving in the right direction, but that’s not nearly enough for the Fed. 

May’s Consumer Price Index headline number fell to its lowest since March 2021, at 4.0% year-over-year versus its 9.1% peak last June.


Taking it as a win, the Fed kept the federal funds rate steady at its FOMC meeting last week. But in the same breath its policymakers signaled that two more 25-basis-point rate hikes are likely this year.  


The chart above explains why. Headline inflation and consumer expectations for prices a year from now have fallen. But the pace of decline in core inflation (ex food and energy) has been glacial, coming in at 5.3% year-over-year in May versus 5.5% in April. 


The problem is stubbornly high prices for services like restaurants and travel, as consumers continue to make up for lost time during lockdown. The stickiness of those prices stems from a strong labor market, which has padded consumer wallets and kept the economy resilient.


Powell told the House Financial Services Committee that reducing inflation “is likely to require a period of below-trend growth and some softening of labor market conditions.” By how much is still unknown. The FOMC has projected unemployment to increase to 4.5% in 2024, from a current 3.7%, and for growth to come in at 1.1%, which suggests a soft-landing. 


So, the tightrope act continues as the Fed judges how high to take rates and how long to keep them there to reach its 2% inflation target without causing a recession.


We expect growth to remain resilient, but there is still a risk of a short-lived, mild recession sometime in the next 12 months, especially if the Fed keeps rates higher for longer.

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