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Eduardo Munoz

Inflation came down in 2023 much faster than anyone expected, sealing expectations that the Federal Reserve won’t raise interest rates this week and shrinking the chances that the economy is headed for a recession.

A year after prices soared to four-decade highs, inflation for all sorts of goods and services has fallen considerably. The shift still leaves actual <a href="https://www.washingtonpost.com/business/2023/08/10/inflation-falling-prices-gas-groceries/" target="_blank">prices</a> for eggs, bread, rent and other basics higher than just a few years ago. But costs aren’t rising at such a dizzying, rapid clip — bringing stability and predictability to household budgets and the economy at large.

Fresh data from the Bureau of Labor Statistics on Tuesday showed that prices rose 3.1 percent in November over the year before, and about 0.1 percent compared with October. That’s still higher than normal, but a vast improvement since the consumer price index peaked at 9.1 percent in June 2022.

Major stock indexes were initially muted on the report before rising later in the day.  The Dow Jones Industrial Average closed up 173.01 points, or 0.48 percent. The S&amp;P 500 index climbed 0.46 percent, and the Nasdaq 0.7  percent.

A steady stream of encouraging news over the past few months all but guarantees that the Federal Reserve will leave rates unchanged when officials gather for their final policy meeting of the year on Tuesday and Wednesday. Since they started hoisting rates in the spring of 2022 as inflation spiked, central bankers were often in catch-up mode, scrambling to get borrowing costs high enough to meaningfully slow the economy. But officials have charted a different path since late summer, pausing rate hikes to see how the economy responds to everything they have done so far.

The answer: The economy has stayed remarkably resilient through high rates, prompting forecasters to slash expectations for a recession. Asked Tuesday whether the United States had averted a downturn and achieved what’s known as a “soft landing,” Treasury Secretary Janet L. Yellen gave a hopeful prediction.

“I believe that’s the path we’re on,” she said at the Wall Street Journal CEO Council Summit.

The big questions now are whether the Fed has indeed reached the end of its aggressive rate-hike campaign — and whether the central bank will cut rates in 2024. The markets are eager for any hints, which could come during Federal Reserve Chair Jerome H. Powell’s news conference on Wednesday afternoon, after the Fed’s two-day meeting.

There were no surprises in the inflation report, and officials have long said that they can only make informed decisions based on months of data. Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, said it was important not to “wildly react in one way or another.”

“I don’t think this really updates our information all that much one way or the other, which is fine,” Strain said. “My view of the situation is not all that much different today than it was yesterday, which means calls for popping the champagne are premature.”

A job? Check. A place to live? Not so much.

Inflation in November was largely driven by housing costs, continuing a persistent trend. Rent was up 0.5 percent compared with October — showing no improvement over the previous few months. Medical care and car insurance were also up.

For over a year, housing costs have played a major role in keeping overall inflation high. And while there are some signs that rents have cooled from their pandemic peaks, experts say it will take some time before the shift shows up in federal data.

“We’re all waiting for the same thing, which is that lag in rents,” said Joe Brusuelas, chief economist at RSM. “That’ll be springtime, maybe.”

The economy is booming, but inflation continues to sour Americans

Gas and energy prices — which surged after Russia’s invasion of Ukraine in 2022 — saw some of the largest drops. <a href="https://www.washingtonpost.com/business/interactive/2022/why-gas-prices-so-high/" target="_blank" class="contextual_link">Gas prices</a> fell 6 percent in November, following a 5 percent drop in October. The overall energy index, which also includes commodities like fuel oil and electricity, fell 2.3 percent in November, keeping momentum going from the previous month.

Officials also keep a close eye on a narrower measure of inflation known as “core,” which strips out volatile categories like food and energy to refine policymakers’ sense of where inflation is sticking. That measure rose 0.3 percent in November, up a smidgen from October but still trending in the direction the Fed wants to see.

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But officials are still many steps short of declaring victory. In a statement, <a href="https://www.washingtonpost.com/elections/candidates/joe-biden-2024/" target="_blank" class="contextual_link">President Biden</a> said that despite recent progress on inflation, “I know many Americans still find too many things unaffordable.” He touted the administration’s moves to bring down prescription drug costs and insurance premiums and to <a href="https://www.washingtonpost.com/business/2023/11/19/companies-lobbyists-fight-junk-fees/" target=_blank>eliminate junk fees</a> — all steps that are outside the Fed’s narrow remit.

Before announcing rate cuts, central bankers will have to explain how they feel comfortable lowering borrowing costs, especially if inflation hasn’t quite hit the Fed’s 2 percent target. Instead of offering a clear timeline this week, Powell will probably caution that “things are looking good, but we’re waiting to see irrefutable evidence that the momentum is still with us,” said Wendy Edelberg, director of the Hamilton Project and a senior fellow in economic studies at the Brookings Institution.

Plus, no one is entirely sure what it will take to snuff out the sources of inflation that don’t come from gas prices or bungled supply chains. Officials expect some relief on the housing front, with roughly 1 million multifamily rental units slated to become available later this year and next. Higher rates are usually expected to lower housing prices, too, by tamping down demand for home purchases as mortgages get more expensive.

But in yet another twist of the pandemic recovery, large parts of the economy aren’t responding to high interest rates as Econ 101 would suggest. The Fed’s benchmark interest rate, known as the federal funds rate, stands between 5.25 and 5.5 percent — the highest level in 22 years.

Economists widely expected that the steep run-up in rates would cause a recession. Instead, key pillars of the economy are roaring.

Crucially, consumer spending continues to propel the economy forward. Employers are still hiring. And in recent months, Powell has pointed to groups that just aren’t that hampered by high borrowing costs, such as homeowners who <a href="https://www.washingtonpost.com/business/2023/05/14/mortgage-rates-housing-supply/?itid=lk_inline_manual_12&amp;itid=lk_inline_manual_17" target="_blank">bought homes</a> when mortgage rates were still low, or businesses that termed out their debt and now aren’t feeling tighter financial conditions.

“It really is a story of much stronger demand,” Powell said in October. “There may be some ways the economy is less affected by interest rates. It’s hard to know precisely.”

Yale University, BA in History

Rachel Siegel is an economics reporter covering the Federal Reserve. She previously covered breaking news for the Post's financial section and local politics for the Post's Metro desk. Before joining the Post in June 2017, Rachel contributed to The Marshall Project and The Dallas Morning News.

Rachel Siegel

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