Nov 30, 2023 - Economy

Inflation is starting to look normal

Illustration of an outstretched arm holding one green and one red arrow-shaped balloon

Illustration: Sarah Grillo/Axios

On both sides of the Atlantic, a favorable trend — a consistent stretch of slowing price gains as inflation edges closer to pre-pandemic norms — is underway.

Why it matters: Inflation has plunged from nosebleed levels, and by some measures is approaching the 2% sweet spot targeted by central bankers. In the U.S., it's happened with little economic turmoil and solid consumer activity.

Driving the news: The Personal Consumption Expenditures Price Index — the Federal Reserve's preferred inflation gauge — rose 3% in October from a year ago, down from the 3.4% the prior month.

  • Core PCE, which excludes volatile food and energy prices, increased 3.5%, slowing from September's 3.7%.

The intrigue: Over the last three months, core PCE rose at a 2.4% annualized rate, holding steady from September. That is within striking distance of the Fed's target.

  • Inflation in Europe, too, is dropping swiftly toward the European Central Bank's target. Preliminary data for November shows inflation at 2.4% in the euro area, versus the 2.9% the prior month.
  • Its core measure was 3.6% — plunging from the 4.2% reading in October.

What they're saying: "Inflation took another step toward returning to its pre-pandemic trends," Nationwide financial market economist Oren Klachkin wrote Thursday morning. "There is more disinflation in the pipeline and we expect inflation to continue to cool in 2024."

Flashback: There were plenty of gloomy warnings that inflation's plunge from last year's steep peak would result in widespread economic damage. The data released Thursday morning is the latest to confirm the contrary.

  • In the U.S., spending did cool from October's brisk pace. But it showed the type of economic slowing one might expect to see, rather than activity collapsing.
  • PCE rose 0.2%, easing from September's 0.7% pace. That spending was supported by wages that grew in real terms thanks to slowing inflation. (The PCE price index was flat for the month of October.)

Yes, but: The economic picture in Europe is more bleak. For one, there's concern that inflation could rebound as it laps a period of high energy prices.

  • Plus, growth in the euro area has "stagnated in recent quarters and is likely to remain weak for the rest of the year," ECB president Christine Lagarde said this week, as higher interest rates pinch.

The bottom line: In Europe and the U.S., price pressures have receded more quickly than some expected, though central bankers might be wary to declare victory. The big question is whether the disinflation continues in 2024.

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