Although the Fed’s efforts to guide the economy through multiple challenges have seen some success, the fight against inflation has now stalled. New data from the Bureau of Labor Statistics’ U.S. Consumer Price Index (CPI) indicates inflation rose to 2.7%, a 10-basis-point increase from last month.
This comes as the index also indicates a stall in CPI core inflation at 3.3%, a figure that has remained the same since September. Despite these challenges, Chair Jerome Powell and the board are expected to cut rates by 25 basis points in the Fed’s final meeting of 2024 on Dec. 18, according to the CME FedWatch tool. This decision could provide short-term relief for the labor market while sustaining economic growth, carrying momentum into the Fed’s first meeting of 2025 in January, where speculators have already indicated another cut is less likely.
Social Security benefits and consumer confidence as indicators
The broader economic conditions are reflected in recent adjustments to Social Security benefits and rising consumer confidence. The Social Security Administration announced a 2.5% cost of living adjustment for 2025, based on previous inflation data indicating a slower pace of price increases. However, this adjustment comes amid concerns about the unsustainability of the system. The SSA projects shortfalls beginning in 2035 as an unprecedented number of people become eligible for benefits over the next five years.
Meanwhile, consumer confidence is showing questionable strength despite inflation’s persistence. A recent survey from the New York Fed surprisingly found that American households are more confident in their financial situations than they have been in five years. While the survey relies on a rotating sample of 1,300 household heads, its accuracy as a representation of overall sentiment is debatable. BLS data, largely due to large revisions, has also had its credibility questioned recently.
Actionable insights for CFOs
CFOs should anticipate a cautious consumer spending market based on relevant findings from both the New York Fed survey and the November BLS CPI report and adjust growth forecasts accordingly.
For instance, median household spending growth expectations are at their lowest (4.7%) since April 2021. At the same time, minimal income growth is being driven primarily by non-college graduates. This could require CFOs to work closely with human resources to design compensation plans that reflect rising costs for their largely college-educated teams.
Additionally, expenses such as motor vehicle insurance have increased 12.7% YoY, according to the BLS — three times the average YoY compensation increase. Medical care costs have also risen 3.1% YoY, but are significantly less than the 9% increases CFOs expect for company healthcare costs in 2025.
