Just a year ago, it looked like inflation was slowing rapidly, and hopes were rising that the Fed would soon be able to cut back on interest rate hikes. Then the Fed — and Wall Street — got punched in the face.
The blow came from an unexpected source: the government counters' annual update of the main inflation tracker known as the Consumer Price Index.
These updates rarely make waves. This time they did it.
New information in February 2023 showed that inflation had not slowed as much as previously thought. To make matters worse, the next two monthly inflation readings were larger than expected.
“It was a complete game-changer,” Ellen Zentner, chief economist at Morgan Stanley, told MarketWatch. “It changed the inflation landscape as we thought and as the Fed thought.”
As a result, the Federal Reserve has continued to raise its key short-term interest rate in the United States in an attempt to slow the economy and tame inflation. The Fed's moves pushed up other interest rates, including mortgages, and crushed would-be homebuyers.
Read more: Mortgage rates hit six-week high
Could it happen again? Wall Street will find out on Friday. The next annual update to the Consumer Price Index is scheduled to be released tomorrow morning — and economists and Federal Reserve officials are looking cautious.
“After being upset about it, I want to see those reviews,” Zentner said. “Maybe no burger.”
Fed Governor Chris Waller is another official eager to see the CPI updated.
“Remember that a year ago, when it looked like inflation was falling rapidly, the annual update of seasonal factors erased those gains,” he said two weeks ago. “I hope the reviews confirm the progress we have seen, but good policy is based on data, not hope.”
Each year, the Bureau of Labor Statistics updates inflation data for the previous five years based on new and improved information. Most years the changes are so subtle that they go unnoticed by the public.
Not last year.
For example, the three-month annual inflation rate was raised to 4.3% in December 2022, from 3.1% previously. That was a big deal at the time.
Why this radical change?
Essentially, the government underestimated the increase in new and used car prices. Car prices rose to record levels in 2022 and 2023, contributing significantly to the highest inflation rate in the United States in 40 years.
This time, economists doubt it will happen again. It is even possible that annual reviews will show inflation slowing slightly faster than previously reported.
Ryan Sweet, chief US economist at the Bank of England, said: “The upcoming annual revisions to the CPI, covering data from 2019 through 2023, are likely to be modest but should show that inflation has been on a better path this year than thought.” “. Oxford Economics.
Barring a surprise in February, the Fed will likely remain on track to lower U.S. interest rates by the spring or early summer, providing relief to home and car buyers and other borrowers.
The latest CPI report for December showed that the annual inflation rate reached 3.4%. The Fed aims to reduce inflation to an annual pace of 2%.
The January CPI report due out next week should also show a further slowdown in inflation, but it could be a tough month.
Many companies raise prices at the beginning of the year, a move that sometimes leads to an unexpectedly large increase in inflation in January.
Greg Robb contributed.