Before the improvement of inflation in the United States, it may get worse, which will raise doubts about the speed of the Fed's interest rate cuts.

Since spring, inflation has been approaching the target level of 2%. The Fed's preferred inflation index has slowed from a peak of 7.3% two years ago to 2.1% in September.

However, the speed of price increases in the past few months has accelerated - referred to by Fed officials as "bumps" - with the expectation that the inflation rate will rise before the end of this year.

It is estimated that the annual rate of the PCE index favored by the Fed is expected to rise from 2.1% in September to 2.3% in October.

Economists at Citibank estimate that by the end of the year, this reading could climb to a high of 2.6% and then begin to fall again in 2025.

If we consider the so-called core inflation excluding food and energy, the data looks even worse. Fed officials believe that core inflation can better predict future inflation trends.

Since July, the annual rate of core PCE index has been stagnant at 2.7% and may climb to 3% by the end of the year.

What's going on here? Is inflation getting worse? Maybe not necessarily.

Some sectors of the economy have recently experienced accelerated price increases. The largest increases are in transportation expenses, such as auto insurance, car repairs, and airfare.

Rents and home prices have not only failed to slow down as expected, but their rate of increase is also faster than usual. Housing is the biggest driver of inflation in the USA and the largest single expense for most families.

However, outside of these categories, most consumer prices are either rising very slowly or even falling completely.

So why is overall inflation rising? Economists as usual have a dazzling expression for this: base effects.

The inflation rate is calculated based on the average price increase over the past 12 months. Whenever a new inflation data is reported, the earliest month is dropped from the calculation.

In 2023, there was basically no inflation in October and November, and only a 0.15% increase in December compared to the previous month.

If the PCE inflation index rises by an average of 0.2% per month in the last three months of 2024, with last year's low readings excluded, the annual inflation rate will inevitably increase.

"Base effects mean that inflation could rise in November and December," said Michael Pearce, Deputy Chief US Economist at Oxford Economics.

However, it is also wrong to say that the rise in the annual inflation rate is a statistical illusion.

Economists point out that short-term price indicators have also increased this autumn.

Richard Moody, Chief Economist at Regions Financial, stated that inflation has proven to be more persistent than many anticipated, and may move slightly higher in the coming months.

However, despite the recent "recovery" in inflation, most Federal Reserve senior officials and Wall Street economists believe that inflation will resume its decline in 2025.

The question is when.

At the beginning of each new year, many companies raise prices. Government economists, when adjusting inflation reports for seasonal changes, try to consider expected growth, but in recent years they have struggled to measure correctly.

The result is what Federal Reserve Chairman Powell calls "seasonal residuality." In simple terms, he believes that the government's official price index exaggerates inflation at the beginning of the year.

How much has been exaggerated? This is left to everyone's speculation.

Economists say that all the Federal Reserve can do is study various reports on inflation and economic health, and then make the best guess as to when the 2% inflation target can be achieved.

The financial markets have already reduced their forecasts for the number of interest rate cuts by the Federal Reserve in 2025. Unless investors see faster progress in lowering inflation at the beginning of the new year, they may become even more pessimistic.

Moody's said, "While few expect inflation to continue accelerating in the coming months, if there is no further slowing down, this could easily disrupt the prospects for the extent and pace of (the Fed) rate cuts."

Editor/rice