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Dec. 2023 – Prices Don’t Go Down

In its latest decision, the Federal Open Market Committee (FOMC) opted to keep overnight lending rates unchanged at the December meeting. This choice preserves the target range, which has remained the same since July 2023. The Fed signaled a likelihood of keeping rates stable in the near future, while also hinting at the possibility of considering rate cuts in 2024.

This outlook is shaped by a trend of slowing inflation, inching closer to a target rate of 2 percent. Nevertheless, there is a degree of confusion concerning the concept of slowing inflation. A survey reveals that 50 percent of U.S. adults believe
their overall financial situation has worsened over the past three years. Public opinion surveys consistently highlight people’s discomfort with their current financial situation, largely attributed to rising prices.

During a recent discussion, Financial Times’ Claire Jones asked Fed Chairman Powell about the apparent gap between economists’ cautious optimism and the public’s concerns about economic conditions.

Powell’s answer is helpful. He stated that, “A common theme is that while inflation is coming down, and that’s very good news, the price level is not coming down. Prices of some goods and services are coming down, but overall, in the aggregate, the price level is not going to — so people are still living with high prices, and that’s not — that is something that people don’t like.” (emphasis added).

In short, lower inflation does not mean prices are decreasing. Our brains may still be anchored to 2021 prices. Take food prices, for example, under the “Food at Home” category in the Consumer Price Index. If your typical grocery bill was $100 in June of 2021, it rose to $112 by June of 2022. The rate of inflation on food was extraordinary.

However, since June of 2022, inflation has slowed considerably. The same bundle of food at the store now costs $118. It increased by $12 in the first year but only went up by another $6 in the subsequent year and a half. This is what economists and the Fed are cheering – the slowdown in the inflation rate.

Regrettably for consumers, the grocery bill is unlikely to revert to $100. Prices are not expected to return to pre-Covid levels. Echoing this sentiment, Fed Governor Christopher Waller pointed out, “Inflation falls … but prices don’t come down. They’re just going up at a slower rate. What people have in their mind right now is … prices to go back to where they were in 2021. That’s not going to happen. These prices are probably there forever.”

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