The latest snapshot of U.S. inflation does little to close the gap between those who think prices will keep rising and others who believe they may have already peaked — a debate whose outcome could determine when the next recession strikes.
The cost of living was unchanged in November, reducing the yearly rate of inflation to 2.2% from 2.5%, according to the consumer price index.
The CPI had hit a six-year high of 2.9% in midsummer.
Yet an alternative CPI index viewed as a more accurate gauge of inflation rose a notch to a four-month high of 2.2% and shows little evidence of diminishing. This so-called core rate stands above the Federal Reserve’s loose 2% target for inflation more broadly.
Where inflation goes in 2019 will say a lot about what happens to the economy.
The Fed has been lifting interest rates to keep inflation from rising so fast it damages the economy. The central bank is expected to raise its key short-term rate again next week to a range of 2.25% to 2.5%.
Yet if the Fed overreacts and raises rates too much, particularly when inflation remains stable, it could cause the first recession in a decade.
“With the economy now slowing moderately, the challenge will be for the Fed to thread the needle between taking sufficient action to keep a lid on inflation while not moving so aggressively to choke of growth,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
Economists who think inflation will keep rising — let’s call them inflationistas — cite a wellspring of sources. Among them:
• Tight labor markets. The U.S. unemployment rate recently fell to a 49-year low of 3.7%, highlighted by a growing shortage of skilled labor. Companies are being forced to offer high wages and benefits.
• Higher cost of supplies. Companies have to pay more for raw materials, a problem exacerbated by U.S. tariffs on products. Another big bottleneck is trucking amid a shortage of drivers.
• Rebounding medical costs. The annual rate of increase in medical expenses fell to a 68-year low of 1.5% in August, but prices are starting to creep higher again. They rose at a 2% annual rate in November.
• Rising rents. The cost of rent has climbed 3.6% in the past year, easily outstripping the increase in inflation and worker pay raises. The last time rents were rising as rapidly as they have in the past year was before the 2007-2009 recession.
Builders have ramped up construction, but not enough to keep up with the formation of new households. “All of those new households have to live somewhere,” said chief economist David Berson of Nationwide.
Other economists doubt inflation will rise much further. They cite:
• A global disinflationary climate. Competition for customers around the world is fierce and the global economy appears to be slowing, making it even harder for companies to raise prices.
• A strong U.S. dollar
. The rising value of the dollar means Americans can buy foreign goods at cheaper prices, limiting the amount of inflation the U.S. imports from other countries.
• Lower oil prices
. Increasing supply by the U.S., a slower world economy and a strong dollar are likely to keep gasoline prices down.
• Tight-fisted businesses and stingy consumers. Companies remain as vigilant as ever in trying to keep costs down. A big reason: Americans are still reluctant to pay higher prices.
“The inflation picture is still fairly tame, certainly not heating up enough to push the Fed to a more aggressive stance,” said senior economist Jennifer Lee of BMO Capital Markets.
Senior members of the Fed are also grappling with their own forecasts for inflation, raising the possibility of the central bank revising its interest-rate strategy in 2019 to move more cautiously than it previously signaled.
“It would appear that central bank policy decisions in the coming months may prove critical,” Baird said.