The Federal Reserve's preferred inflation gauge experienced a further cooling trend last month, even as the economy continued to grow at a brisk pace. This development is likely to be welcomed by the Biden administration as President Joe Biden seeks re-election, with his economic stewardship playing a pivotal role in the campaign. According to a government report released on Friday, prices rose by just 0.2% from November to December, aligning with pre-pandemic levels and barely exceeding the Fed's annual target of 2%. On a year-on-year basis, prices increased by 2.6%.

The report indicated that excluding volatile food and energy costs, "core" prices rose by only 0.2% from month to month and 2.9% from a year earlier, marking the smallest increase since March 2021. Economists consider core prices as a more reliable indicator of the likely path of inflation. This data suggests that the economy is achieving an elusive "soft landing," wherein inflation falls back to the Fed's target without a recession. Consequently, this outcome could make it easier for the Fed to consider cutting its key interest rate, which had been raised 11 times since March 2022 to combat inflation. The higher borrowing costs resulting from these rate hikes had adversely impacted home sales and businesses.

Contrary to earlier expectations of a recession, the economy demonstrated robust growth in the final three months of 2023, expanding at a stronger-than-anticipated annual pace of 3.3%. This growth was driven by solid consumer spending, culminating in a year that defied predictions and produced a healthy expansion.

President Biden's Republican critics had been highlighting the significant inflation spike witnessed over the past four decades, largely blaming the president's spending policies. However, with the sharp decline in inflation following an extended period of consumer pessimism, Americans are beginning to feel more positive about the economy. Measures of consumer confidence, such as the University of Michigan index, have shown significant increases in the past two months, the largest jump since 1991.

Analyzing the details of Friday's report, all indicators point to inflation being under control. Over the past six months, prices have risen by a modest 1.9%, actually below the Fed's target. Looking at the past three months, the figure decreases further to 1.5%. Grocery prices, which had been experiencing sharp increases for almost two years, remained unchanged in December and were only 1.3% higher than the previous year. Chicken prices even dipped by 0.4% from November to December, with a marginal increase of 1.2% compared to a year ago. However, beef and veal prices continued to rise, increasing by 0.3% in December and remaining 8.7% higher than the same month a year earlier.

The release of this report comes less than a week before the Federal Reserve's upcoming policy meeting. While it is expected that interest rates will remain unchanged, market attention will be directed towards Chair Jerome Powell's news conference for any indications of potential rate cuts.

Lydia Boussour, a senior economist at consulting firm EY, stated that "The Fed will be welcoming the inflation data. It does suggest that inflation is on track, and the Fed is well-positioned to start (cutting rates) in a few months."

The steady decline in inflation during 2023 can be attributed to the recovery of global supply chains from pandemic-related disruptions and an increase in employment as more Americans return to work. Slower wage growth alleviates the pressure on businesses to raise prices to compensate for higher labor costs. According to the Fed's preferred measure, inflation reached its peak at 7.1% in June 2022.

As a response to the price spikes of the past two years, there are signs that some companies are refraining from raising prices or implementing smaller increases. The Fed's most recent beige book report, which collects anecdotes from businesses across the country, indicates that companies now have limited ability to raise prices.

Auto dealerships, in particular, are witnessing this trend. With an increased inventory of vehicles compared to the pandemic period when factory shutdowns left consumers desperate, car dealers now find themselves competing for customers. David Kelleher, owner of a Chrysler-Jeep dealership near Philadelphia, reported a 70% decrease in profit margins since 2021. As a result, Kelleher is offering enhanced discounts to attract buyers.

Looking ahead, December's projections from the Fed indicated that they would execute three quarter-point rate cuts in 2024, but without specifying the timing of the first cut. Wall Street traders had previously anticipated that the first rate cut would occur in March of this year.