How December’s inflation uptick complicates Federal Reserve’s plan to lower interest rates

Geoff Bennett:

New data shows that inflation ran a little higher at the end of the year than expected, but slowed down significantly in 2023.

Amna Nawaz:

And consumers are still hesitant to embrace the economy's strength, a theme that was consistent throughout last year's strong economic performance.

For more on how we can use these latest numbers to understand what might be ahead, and how consumers are viewing the economy, I spoke earlier today with Raphael Bostic, president of the Federal Reserve Bank of Atlanta.

Mr. Bostic, welcome to the "NewsHour." Thank you for joining us.

Raphael Bostic, President, Federal Reserve Bank of Atlanta: Thank you. It's good to be here.

Amna Nawaz:

So let's just start with your reaction to those inflation numbers today. Overall, consumer prices rose a little more than expected in December. Core prices, excluding food and energy, also rose more than expected. What do those numbers say to you?

Raphael Bostic:

Well, today's CPI report has not been as positive as some of the last couple.

But seeing some volatility in inflation is not really a surprise to me. The economy has been very strong and robust over the last year, and that resilience has really been a positive thing. It's actually been stronger than I expected. But that resilience also means that the pace of inflation or the speed of it coming back down to our target is going to be slower.

And so seeing some reports every now and then that are going in the other direction is par for the course. And I'm expecting that things will be bumpier as we continue through the next year.

Amna Nawaz:

Most of that inflation increase that we saw was due to higher costs for both car insurance and also for housing.

Housing costs, in particular, accounted for more than half of the monthly increase in consumer prices. We are in, as you know, a nationwide housing shortage. So is the only way to bring those increases down to build more homes?

Raphael Bostic:

So, yes.

So, you noted that we have the shortage. Everywhere I go across the Sixth District, I hear exactly the same thing. And this is a supply issue as much as a demand issue. So one part of affordability is having enough income. But in many markets, Atlanta being one of them, the growth in population has outstripped the growth in units.

And that's going to put up a pressure on prices. And so we need to see more supply.

Amna Nawaz:

Now, the Fed has signaled that they're done raising rates. Do you believe that rates should begin to be lowered soon?

Raphael Bostic:

Well, soon — soon means different things to different people.

Look, my expectation is that inflation is going to decline slowly over the course of 2024, which means that we won't be in a position to cut rates for quite some time. My outlook has us showing rates starting to fall in the third quarter of this year. But, again, we will have to see how inflation progresses in the next several months.

Amna Nawaz:

Well, three days ago in a speech, you did say that, as you mentioned, inflation has come down. You have mentioned you're on this path to reaching that target of 2 percent.

When do you expect that target to be reached? Is there any way to predict that, given, as you said, it's not a linear path?

Raphael Bostic:

Well, we have models, and models will give us an answer.

My outside model on this says that we should get to 2 percent in our measure some time in 2025, but a lot's going to happen between now and then. So I don't put too much stock in any of those longer-term issues. And I just try to keep an eye on where things are going month to month and try to just have a clear understanding about where we stand.

If the economy comes in stronger and inflation goes faster to our target, then I will be willing to pull forward, perhaps, my willingness to cut. But we will just have to see how things play out.

Amna Nawaz:

I hear your note of caution. I'm curious if you can tell us more about where you see that potential volatility. Is it domestically, turmoil around the elections? Is it globally with more instability and two wars? Where are you looking?

Raphael Bostic:

I'm looking everywhere, to be honest.

You called out two things. Geopolitics and the global issues are a big problem. We have seen just in the last several days the cost of shipping go up by a considerable amount because of turbulence in the Middle East.

In the Southeast, we have seen storms that have created historic levels of damage and disrupted economies in significant ways. And there's still uncertainty about the progression of the virus. As you know, we're seeing more people get sick and tragically die.

And so all of those things will come into play. And depending on how they play out, that will have a real implication for the trajectory of the economy.

Amna Nawaz:

Mr. Bostic, can I get your take on this so-called vibe session, this idea that consumer confidence — and we have seen this over the last year — has really lagged behind the actual strength and recovery of the economy.

When you look at that, how do you explain that gap?

Raphael Bostic:

Well, for me, I think it really is about a reminder, a memory that many people have that prices are much higher than they were two years ago. And their wages did not go up as much.

And so that realization, that recognition is really present in people's minds. We all go to the grocery store on a regular basis. Gas was much higher. It's come down. So that's not a pressure point nearly as much. As we start to see more and more of goods get back to pricing that is close to where it was before, or if our incomes go up more strongly, I think that that kind of negativity will likely dissipate, and we will start to see the numbers evolve.

But human psychology is not something that turns on a dime, and it would really take time and experience lived for those things to shift.

Amna Nawaz:

And we did see, I should mention, consumer confidence go up slightly in December. But, overall, there's been concern that it could become, that pessimism could become sort of a self-fulfilling prophecy and could potentially lead to a recession.

Do you still believe there could be a recession?

Raphael Bostic:

Well, there's always a probability of a recession, but one thing I will say is this.

We spend a lot of time tracking people's expectations about where the economy is likely to go. And I have been really pleased to see that the American people, by and large, have confidence that inflation is going to get back to 2 percent and that the economy will be able to stand on its own and grow and be robust.

As long as we start to continue — as long as we continue to see signs like that, I have every confidence that the economy will be fine, growth will happen, businesses will continue to hire and produce, and the quality of life in this country will continue to improve.

Amna Nawaz:

All right, that is the president of the Federal Reserve Bank of Atlanta, Raphael Bostic, joining us tonight.

Mr. Bostic, thank you so much for your time. Appreciate it.

Raphael Bostic:

Thank you so much for inviting me.