The United States is beginning to win the battle against inflation. The US Federal Reserve’s aggressive rate hikes have cooled demand, which has coincided with the drop in oil prices in international markets. With that, inflation ended 2022 at 6.5%, according to December data released this Thursday by the Bureau of Labor Statistics. This is the sixth straight fall in the annual rate and brings inflation to its lowest level since October 2021. With the new data, the central bank will be able to slow the pace of interest rate hikes further, as it did at the last meeting of the Bank Monetary Policy Committee.
In fact, prices fell 0.1% monthly in December thanks to cheaper gasoline, which actually posted a 1.5% year-on-year fall. For the first time in a long time, filling up the car is cheaper than a year ago. Core inflation, which excludes energy and food prices for self-consumption, has also declined, albeit to a lesser extent. It rose from 6.0% in November to 5.7% at the end of the year.
Food price increases are slowing but still continuing at very high rates. Home purchases have increased 11.8% over the past 12 months, while eating out has risen 8.3% year-on-year. Airline tickets became cheaper in December, thanks in part to lower fuel prices, and car prices, particularly used cars, also fell.
The new data is also a respite for United States President Joe Biden, whose popularity has been particularly hurt by the price hikes. The White House has put Biden’s intervention on the economy and efforts to fight inflation on the President’s agenda this Thursday to capitalize on the release of favorable data. Lower gas prices since pre-summer peaks explain a good part of the fall in inflation.
The inflation rate is still well above the US Federal Reserve’s price stability target of 2%, but this is a relief for its President Jerome Powell. In addition, wage growth is moderate, according to data released last week, which money managers are watching closely to avoid spiraling prices and wages, causing inflation to become more entrenched than desired.
Over the past six months, inflation has fallen from 9.1% in June. It’s not even halfway to the central bank’s target. For this reason, the monetary policy committee plans to raise interest rates further and keep them high for as long as necessary. In a speech this week, Powell extolled the benefits of Federal Reserve independence: “Price stability is the foundation of a healthy economy and, over time, it brings untold benefits to the public. But restoring price stability when inflation is high may require measures that are not popular in the short term as we raise interest rates to slow the economy. The lack of direct political control over our decisions allows us to take these necessary steps without regard to short-term political factors.”
However, this Thursday’s data supports the thesis that rate hikes will be slower than they have been so far. In December, after four consecutive hikes of 0.75 percentage points, the Federal Reserve felt it needed to pause and see how the tightening policy plays out and decided to extend a 0.5 percentage point hike into the 4.25 area to approve %-4.5%.
“We believe this week’s CPI core inflation figure will cement the pace of the US Federal Reserve’s tightening by another notch. After a 50 basis point (bp) hike at the December meeting, we expect the Fed to move to a 25bp rate of increase in early February, eventually pausing at around 5%,” say economists Tiffany Wilding and Allison Boxer of fixed income giant PIMCO.
With an unemployment rate of 3.5%, the lowest rate in half a century, the central bank is still trying to walk the narrow path that would allow it to avoid a full-blown recession and secure the long-awaited soft landing for the economy to reach. Most economists think a recession is likely, but also expect it to be mild and do not rule out that the US will be able to avoid a recession given the strength of the labor market. Faced with labor shortages and difficulties in hiring, companies are thinking twice before laying off their employees, as they did at other times when demand began to fall and recessionary momentum increased.
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