As expected, US inflation continued to decline steadily in November, slowing down by more than 0.6 p.p. to 7.1% y/y. The inflation data pleased financial markets: the rapid slowdown of inflation, in their opinion, means the imminent end of the monetary policy tightening cycle and its reversal towards easing.
However, despite the apparent success of the Fed in slowing price growth, the regulator is still far from its ultimate goal.
The lion’s share of the decline in inflation is provided by only two components: fuel and car prices, while the dynamics of other components remained near the levels of the previous month.
The slowdown in fuel prices is primarily due to the suppression of global economic growth, while the slowdown in car prices was a consequence of both a decline in demand for cars due to higher lending rates for their purchase because of the Fed’s rate hike, and an increase in supply due to improvements in the supply chain of automotive components, primarily semiconductor products.
The Fed will indeed slow down the rate hike from 0.75 to 0.5 p.p. at the end of December and will probably end the cycle of rate hikes early next year, but this will not mean the end of the cycle of monetary policy tightening, much less the beginning of its easing any time soon.
The Fed’s monetary tightening in 2023 is likely to shift towards reducing the volume of the Fed’s pandemic bloated balance sheet, which is now no less important a policy tool for the regulator than interest rates.
At the end of today’s meeting, the U.S. Central Bank is likely to try to cool the ardor of investors seeking to raise prices again and again in anticipation of signals about the end of the tightening cycle of interest rates. In addition, tomorrow the new forecasts of the Fed members for the next three years will be published, which may also disappoint financial players, as the Fed rate forecast by the regulator for the next year may be much higher than market expectations.
