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The Impact of Inflation on the Economy

The latest signal of inflation’s retreat is in the books as the year comes to an end. Despite this, experts have differing opinions on the implications for the economy and the Federal Reserve’s potential response to these developments.

Price increases cooled last month, adding credence to the belief that the Federal Reserve is very likely to start cutting rates as early as March, said Jamie Cox, managing partner for Harris Financial Group.

“Disinflation is in the data now, and that is wildly positive for the economy and the market,” he said in a note on Friday, after the release of new PCE data. However, other experts expressed caution regarding the potential impact of these inflation trends on the economy.

While inflation readings continue to trend downwards, the figures remain well above the 2% target set by the Federal Reserve. In fact, even as some market watchers have recommended the Fed adjust its inflation target to reflect the nuances of the current economy, Fed Chair Jerome Powell has explicitly resisted those calls, repeatedly emphasizing that the central bank will eventually achieve 2% inflation.

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Alex McGrath, chief investment officer for NorthEnd Private Wealth, said the 3.2% print is less supportive of the imminent rate cuts the market is expecting. ÔÇ£This especially comes into focus looking at the durable goods orders that came in wildly above expectations,ÔÇØ he said on Friday. If the economy never slows down enough to fully stamp inflation out, and the Fed begins cutting rates, that may invite a fresh wave of inflation, he said.

Despite differing viewpoints, as Quincy Krosby, chief global strategist for LPL Financial, said in a note Friday, ÔÇ£3.2% represents a victory for a Federal Reserve that remains keenly focused on restoring price stability without damaging a still healthy labor market, in essence balancing its two mandates.”

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