Fed’s Jefferson says CPI shows path down for inflation likely to be bumpy

  • Likely to be appropriate to begin cutting policy rate later this year
  • January CPI disappointing
  • Fed staff estimate PCE price index rose 2.4% over the 12 months ended in January
  • Three key risks are resilient consumer spending, employment weakening and geopolitical risks
  • Says he expects slower growth and output in 2024
  • He remains cautiously optimistic about progress on inflation, will review totality of data
  • Imbalance between labor supply/demand has narrowed
  • Fed needs to remain vigilant and nimble, should not be surprised by an unexpected shock
  • Most easing cycles start because of concern about slowing economic growth
  • Highlights the speed at which economic activity can weaken
  • Full text

Here is what he said on the inflation outlook:

I believe that this progress reflects both the unwinding of pandemic-related supply and demand distortions in the economy as well as restrictive monetary policy, which has cooled strong demand and given the supply side of the economy time to catch up. As shown in, over the 12 months ended in January, the Federal Reserve’s staff estimates that total personal consumption expenditures (PCE) prices rose 2.4 percent, down from 5.5 percent over the preceding 12 months. Core PCE prices, which excludes energy and food prices, rose 2.8 percent, down from 4.9 percent. The figures for January are estimates that incorporate the somewhat larger consumer price index (CPI) increase we saw last month. That disappointing CPI reading highlights that the disinflation process is likely to be bumpy. The January data notwithstanding, the slowing in core inflation has been especially pronounced in recent months, as the 3- and 6-month changes in core PCE prices through January, at 2.5 percent and 2.4 percent, respectively, clearly remain below the 12-month change shown in figure 2. The most striking moderation has been in core goods prices which have declined outright over the past year. Inflation in core services, both in its housing component and nonhousing services, has also slowed, but not as much. I believe that as the labor market continues to cool, core services price increases will continue to moderate. Of course, I remain attentive to other possibilities.

The overall thrust of the speech argued that unemployment can rise quickly once the economy turns; it’s a dovish message.

This article was written by Adam Button at www.forexlive.com. Source