Is inflation uncooperative or incorrigible?

If you are the Federal Reserve and your preferred measure of inflation refuses to cooperate, what do you do? That’s the question facing the Fed as it reviews incoming economic data ahead of its next meeting on December 18. 

The year-over-year Personal Consumption Expenditure inflation measure rose from 2.1% to 2.3% in October, while the core measure, which excludes more volatile components, rose from 2.7% to 2.8%, all well above the Fed’s 2.0% target. For five months running, there has been no progress toward the 2.0% target. Does this cause the Fed to adjust its target, or simply wait to see more data? The Fed has been steadfast in not changing its target, so it will likely wait for more confirmation of which direction prices are moving. 

Other measures of the economy, including weekly jobless claims, point to steady growth and strong labor markets. Jobless claims have fallen to 213,000, levels last seen in early May. The next key labor data point will be the monthly employment report, to be released on December 6, and it is expected to show a solid rebound to a gain of 200,000 new jobs from the storm-depressed 12,000 in October. Other activity measures will help fill out the economic picture in the coming days. 

At this point, markets still expect the Fed to cut its fed funds rate once by the end of January and a total of three times by year-end 2025. The Fed will lay out its economic projections at its next meeting, including growth, inflation, unemployment, and fed funds target rates over the next few years.