Inflation might have dropped below 3% last month for 1st time in 3 years, a milestone for Biden

It’s possible that last month’s inflation dropped below the 3% annual rate, which would be a major turning point as the Biden administration looks to improve Americans’ perceptions of the economy ahead of the November elections. This would be the lowest level of inflation in over three years.

Forecasts published by data source FactSet indicate that economists believe the government’s most recent consumer price index, which is released on Tuesday, will reveal that prices increased by just 0.2% from December to January for the third consecutive month. It is anticipated that declining petrol costs have reduced total inflation.

Additionally, inflation is believed to have dropped significantly from 3.4% in December to 2.9% compared with a year earlier. That would be the lowest annual inflation rate since March 2021, when supply constraints brought on by the epidemic and increased consumer spending stimulated by stimulus cheques caused prices to spike.

President Joe Biden would have the chance to assert that price hikes are gradually slowing down despite the fact that the economy is still expanding and that unemployment is still very close to a half-century low if inflation dropped below 3%. Even still, a lot of Americans are still angry because average prices are around 19% more than they were when Biden entered office due to the largest inflation increase in 40 years, which is linked to the epidemic.

Tuesday’s data, if it proves to be as mild as expected, may also contribute to the “greater confidence” that Federal Reserve officials have said they need to conclude that inflation is sustainably declining to their 2% target level, allowing them to start cutting interest rates from their current high levels.

Still, not all the inflation measures that will be reported Tuesday are expected to be so favorable. Excluding volatile food and energy costs, so-called “core” inflation could look stickier. Core inflation is watched closely because it typically provides a better read of where inflation is likely headed.

Core prices are forecast to have risen 0.3% in January for a third straight month. Though that figure would reduce annual core inflation from 3.9% to 3.7%, it would still be well above the level the Fed would like to see.

One factor that probably kept core prices up last month is that January is when many businesses impose price increases. While the government seeks to adjust its inflation data for such seasonal factors, it doesn’t always do so perfectly.

Economists at Goldman Sachs have forecast that such adjustments will raise prices, in particular, for car insurance, prescription drugs and health care services. Other analysts have projected that the costs of hotel stays and airline fares jumped from December to January.

Because such figures will likely show that inflation remains elevated, most economists think the Fed will want to wait until May or June to begin cutting its benchmark rate from its 22-year-high of roughly 5.4%. The Fed raised its key rate 11 times, from March 2022 to July of last year, in a concerted drive to defeat high inflation. The result has been much higher borrowing rates for businesses and consumers, including for mortgages and auto loans.

Tuesday’s data will also shed light on a concern of the Fed, which Chair Jerome Powell highlighted during a recent news conference: Most of the decline in inflation so far has stemmed from falling prices for goods, including used cars, furniture and appliances, which have dropped in six of the past seven months.

The costs, though, of services — auto repairs, health care, hotel rooms, concerts and other entertainment — are still rising at a brisk pace. Core services prices, which exclude energy, jumped 5.3% last year. By contrast, goods excluding food and energy rose just 0.2%. The Fed will want to see some cooling in services prices to become more assured that inflation is declining.

A rate cut by the central bank typically lowers the costs of mortgages, auto loans, credit cards and other consumer and business borrowing, and could bolster the economy. But a stronger economy could also pose a challenge for the Fed because faster growth can accelerate wages and consumer spending. If businesses aren’t able to keep up with greater customer demand, they can respond by raising prices, which would worsen inflation.

In the final three months of last year, the economy grew at an unexpectedly rapid 3.3% annual rate. There are signs that growth remains healthy so far in 2024. Businesses engaged in a burst of hiring last month. Surveys of manufacturing companies found that new orders rose in January. And services companies reported an uptick in sales.