December CPI report shows inflation 6.5% y/y, first drop since May 2020

Rising consumer prices in the US moderated again last month, bolstering hopes that inflation that has gripped the economy will continue to ease this year and that the Federal Reserve may need to act less aggressively. more to control inflation.

The government said inflation fell to 6.5% in December from a year earlier. This is the sixth consecutive decline in the past year, down from 7.1% in November. On a monthly basis, the actual price fell 0.1% from November to December, which is the decline. first since May 2020.

The weaker data added to signs that the worst inflation in four decades is waning. However, the Fed does not expect inflation to slow down enough to get close to its 2% target through 2024. The central bank is expected to raise the benchmark interest rate by at least a quarter of a point over the course of the year. next meeting at the end of 2024. this month.

Excluding volatile food and energy costs, so-called core prices rose 5.7% in December from a year earlier, slower than the 6% year-on-year increase in the month. 11. From November to December, core prices increased only 0.3%, the third consecutive monthly decline, after gaining 0.2% in November.

Even as inflation slowly slows, it remains a painful reality for many Americans, especially with necessities like food, energy, and rents that have skyrocketed over the past 18 months.

Grocery prices rose 0.2 percent from November to December, the smallest increase in nearly two years. However, these prices are still up 11.8% from a year ago.

Behind much of the drop in overall inflation has been falling gas prices. According to AAA, the national average price of a gallon of gasoline fell from $5 in June to $3.27 on Wednesday.

Also contributing to the slowdown were used car prices, which fell for the sixth straight month in December. New car prices also fell. The cost of airline tickets and personal care such as haircuts are also reduced.

The supply chain constraints that drive up the cost of goods have been largely cleared up in the past. Consumers have also shifted most of their spending away from physical goods and toward services, such as travel and entertainment. As a result, prices of goods, including used cars, furniture and clothing, have fallen for two consecutive months.

Last week’s jobs report for December reinforced the possibility that a recession could be avoided. Even after seven Fed rate hikes last year and with inflation still high, employers added 223,000 jobs in December and the unemployment rate fell to 3.5%, matching the lowest in 53 years.

At the same time, average hourly wage growth slows, which should alleviate pressure on companies to raise prices to cover their higher labor costs.

Another positive sign for the Fed’s efforts to contain inflation is that Americans generally expect price increases to decline over the next few years. That’s important because so-called “inflation expectations” can be self-satisfying: If people expect prices to continue to rise sharply, they will often take steps, such as demanding higher wages. could lead to persistently high inflation.

On Monday, the Federal Reserve Bank of New York said consumers now expect inflation to be 5% next year. That was the lowest expectation in nearly 18 months. Over the next five years, consumers expect inflation to average 2.4%, just above the Fed’s 2% target.

However, in their remarks in recent weeks, Fed officials have emphasized their intention to raise the benchmark short-term rate by three-quarters of a point in the coming months to just above 5%. Such increases would follow seven hikes last year, nearly doubling mortgage rates and making auto and business loans more expensive.

Futures prices suggest that investors expect the central bank to be less aggressive and make only two quarter point hikes in March, leaving the Fed’s interest rate at just under 5%. Investors are also predicting that the Fed will cut rates in November and December, according to the CME FedWatch Tool.

Fed Chairman Jerome Powell has sought to push back on expectations of fewer rate hikes this spring and cut them later in the year, which could make the Fed’s job more difficult if investors raise equities. bonds and lower bond yields. Both trends could support faster economic growth just as the Fed is trying to cool it down.

Minutes of the Fed’s December meeting noted that none of the 19 policymakers foresaw a rate cut this year.

However, last week James Bullard, president of the Federal Reserve Bank of St. Louis, expressed optimism that this year, “real inflation is likely to follow inflation expectations to a lower level,” suggesting that 2023 could be a “year of deflation.”

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