Is it time for the Fed to declare victory on inflation? Not yet.

The decline in the consumer price index in December brings the Federal Reserve closer to achieving its inflation target, though it is unlikely to signal any change in policy in the near future.
The key inflation gauge fell by 0.1% last month, which was in line with what market analysts had predicted. This is the biggest drop that has been seen since April of 2020.
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The CPI for all items is still 6.5% higher than it was a year ago, but the rate of increase has been steadily declining since June 2022, when it peaked at around 9%. This is due to a sharp drop in gas prices and some serious interest rate increases from the Fed.
Now the question is how much more evidence policymakers will need to see before they take their foot off the brake.
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Mark Zandi, chief economist at Moody's Analytics, said that if the Fed is doing a forecast, as it should be, then the data strongly suggests that interest rate increases will soon come to an end. "There's nothing not to like about this report," he said. "Inflation is going to come down here."
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Dean Baker, senior economist at the Center for Economic and Policy Research, is very emphatic that it is time for the Fed to declare victory and stop rate hikes. He cites a three-month decline in services inflation less shelter costs as evidence that inflation is on the run.
However, given how aggressive central bankers have been since initiating rate hikes back in March 2022, and how cautious they’ve been about viewing isolated data points as part of a broader trend, the likelihood of taking the win now seems remote.
Both headline and core inflation are still well above the Fed's 2% target. Chair Jerome Powell has said that the services less shelter component of inflation is a key consideration, as rent costs are likely to ebb later this year.
However, he and his colleagues have also emphasized the importance of remaining vigilant and have said they see more danger in easing up than in continuing to push hard, even if it means grinding the economy to a near halt.
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The central bank has a robust labor market going for it now, which has withstood higher rates. However, this is both a blessing and a curse, as wages have continued rising and threaten to send inflation higher.
"A 'soft landing' is when you can reduce inflation without harming the job market," said Randy Frederick, managing director of trading and derivatives for Charles Schwab. "That's what we're seeing with the data from last week and today's inflation report."
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The nonfarm payrolls report for December showed a solid increase of 223,000 jobs. Average hourly earnings growth declined to 4.7%, but Frederick expects the Fed to note the data at its next meeting on Jan. 31-Feb. 1 without committing to a change in policy.
"The data has been improving, but I don't think the Federal Open Market Committee wants to tip its hand on what's going to happen at its next meeting," Frederick said.
The market is pricing in a near certainty that the FOMC will again step down the level of its interest rate increase, to 0.25 percentage point on February 1, according to CME Group. The expectation is for another quarter point interest rate decrease in March, followed by a pause before the committee knocks as much as a half a percentage point off the fed funds rate by the end of the year.
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Philadelphia Fed President Patrick Harker said Thursday that he favors the Fed stepping down to quarter-point increments and then pausing. His fellow policymakers have stated firmly that they don’t see any rate cuts ahead in 2023.
The market is trading differently than what was expected.
The hike following the March meeting will give the FOMC time to ponder the impact of all the increases. If market pricing is correct, there will be nine increases in all, totaling 4.75 percentage points.
What is not anticipated is any early indication of a victory over inflation.
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Simona Mocuta, chief economist at State Street Global Advisors, believes that the Fed is unlikely to declare victory anytime soon. She expects them to be cautious in their language and tone, even though they may soon reduce the size of their interest rate hikes. According to Mocuta, the Fed is taking a "better safe than sorry" approach.