Feb 9, 2024 - Economy

How the Fed’s inflation fight has changed over the last year

Illustration of an open heart locket with pictures of George Washington and Ben Franklin inside.

Illustration: Allie Carl/Axios

One year ago, a slew of surprises pointed to more entrenched inflation and a tighter job market, tilting the Fed in a hawkish direction and fueling more interest rate increases. This February, there are some superficial similarities in the data — but the differences are more important.

Why it matters: Economic activity appears to be expanding like gangbusters at the start of 2024. But it is happening against the backdrop of benign inflation and a loosening labor market, setting off fewer alarm bells at the Fed.

  • So while the central bank may not be set to cut interest rates as soon as Wall Street would like, there is no reason to think they will reevaluate their entire policy outlook.

Driving the news: Friday morning, the Labor Department released revisions to the seasonal adjustment factors used in calculating the Consumer Price Index. Against all odds, this had become one of the most anticipated economic releases of the month.

  • That's because of what happened last February. Changes to the adjustment factors inverted the narrative of what happened to inflation in 2022 — showing not a steady deceleration as the year progressed but rather a bumpy path without a clear downward trend.
  • Good news, though! This year's revisions affirmed the narrative that inflation receded over the course of last year.
  • The revisions "present no ugly surprises, adding to the Fed's confidence that inflation is heading durably back to 2 per cent, and ticking one more box on the road to rate cuts," said analysts at Evercore ISI in a note.

Flashback: This time a year ago, the revisions weren't the only thing undermining a rosy economic narrative; the January jobs numbers, retail sales and others came in red-hot.

  • Fed governor Christopher Waller was reportedly asked by an associate how he was doing at a late February conference last year. "Great until February 3," he quipped, according to the Wall Street Journal — the day that January jobs report dropped.
  • The run of data fueled interest rate increases in March, May and July of last year.

Yes, but: The underlying situation is different in 2024.

  • The starting point for inflation is much better. The most recent number on the core personal consumption expenditures price index was 2.9%, versus 4.9% a year ago.
  • While the headline job market numbers — net job growth and the unemployment rate — remain strong, the evidence beneath the surface points to a bit more slack in the labor market now. There are 1.4 job openings per unemployed American, for example, down from 2 a year ago.
  • Worries have faded that high inflation will become locked into business and consumers' psychology, as a wide range of survey data and anecdotal information point to falling inflation expectations.

What's next: Next week will bring more key inflation data, with CPI out Tuesday and the Producer Price Index on Friday.

Go deeper