Insights

The 12-month inflation rate, as measured by the personal consumption expenditures (PCE) index, was 2.6% in December, down from its peak of 7.1% in June 2022, and the six-month rate for PCE inflation was even lower, at 2%, which is the target rate set by the Federal Reserve.   

After the nation suffered the worst inflation in four decades in 2021 and 2022, the Federal Reserve’s Federal Open Market Committee hiked rates 12 times from March 2022 to July 2023 and it appears to have succeeded in its battle to end inflation without causing a recession.

Since the Fed has never succeeded before in quelling inflation without choking economic growth and causing a recession, much skepticism about the growth prospects for the economy remains. However, there are reasons for optimism.  

Federal Reserve Board Governor Adriana Kugler, in a February 7 speech at The Brookings Institution, a respected policy think tank, said housing inflation, a stubborn inflation problem because tenant rents move slowly based on year-long lease agreements is slowing. She expects continued easing of housing inflation, which accounts for about 15% of the PCE inflation index. 

In addition, services inflation, which accounts for 50% of the PCE inflation index, is also showing signs of softening.  Core services, excluding inflation, peaked at 5.2% in December 2021, she said, but came down to 3.3% in December 2023, and hiring plans, according to the most recent Labor Department Job Openings and Labor Turnover Survey. While two jobs were open for every job seeker during much of 2023, there are now about 1.5 jobs for every job seeker, according to the latest statistics, said Ms. Kugler, a labor economist who previously served as U.S. executive director of the World Bank.           

“Labor force participation has risen sharply for prime-age workers since early in the pandemic, particularly among women, who last year reached the highest participation rate on record,” Ms. Kugler said. “And we have seen an increase in immigration—a source of workers that is particularly important for certain sectors. For example, in the construction sector, about one-fourth of all workers are non-natives, and in leisure and hospitality, the share is about one-fifth.”

Ms. Kugler said she is concerned about geopolitical developments, citing Russia’s war on Ukraine and the widening of the war in the Mideast. Yet she is optimistic about U.S. economic prospects. “I am pleased with the disinflationary progress thus far and expect it to continue,” she said. ”I must emphasize, however, that the Committee's job is not done yet.

“Consumer spending was surprisingly strong last year,” Ms. Kugler said. “Gross domestic product grew at a nearly 5% rate in the third quarter, led by consumption.”