After Months of Stubborn Inflation, Glimmers of Hope Emerge

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Health insurance, which has been slightly adding to inflation, is now beginning to slightly subtract from it because of the way it is calculated, and that is expected to continue. That health insurance decline only matters for C.P.I., though: It will not feed into the Personal Consumption Expenditures inflation index that the Fed officially targets.

And risks that could keep inflation sharply elevated persist, especially as consumer demand proves resilient and the labor market remains strong. A big question going forward is what will happen in services outside of housing: Pet care, child care, health care, manicures, meals out and the like.

Prices for services are closely tied to wage gains, which have been climbing swiftly in recent months. If that continues, it could be hard for inflation to fall the whole way back to the roughly 2 percent pace that was normal before the pandemic. Companies are likely to try to pass rising labor bills along to consumers in the form of higher prices.

“Services inflation, which tends to be sticky, has not really shown signs of slowing,” said Ms. Mester, from the Cleveland Fed. “Inflation continues to be broad-based.”

While Fed officials do not want to tighten policy so much that they unnecessarily harm growth and cost American jobs, they are also wary of doing too little.

The central bank has learned from the experience of the 1970s, when officials were never resolute enough in raising interest rates to fully stamp out price increases. As inflation remained high for years, businesses and consumers came to expect it and adjusted their behavior in ways that made inflation even harder to control.

Back then, “the Fed said: ‘well, OK, we’ve got it coming down, so now we’ll stop raising rates, stop trying to fight it back,’ and then it sort of reared its ugly head again, and got embedded in psychology,” Ms. Daly said. “I’m not prepared to make that mistake.”

Joe Rennison contributed reporting.