WASHINGTON (AP) – Rising U.S. consumer prices moderated again last month, bolstering hopes that inflation’s hold on the economy will ease further this year and may require less drastic action from the Federal Reserve to contain it check.
Inflation fell to 6.5% year on year in December, the government said on Thursday. It was the sixth consecutive year-over-year slowdown, down from 7.1% in November. On a monthly basis, prices even fell by 0.1% from November to December, the first such decline since May 2020.
The weaker readings add to growing evidence that the worst wave of inflation in four decades is beginning to ease. Still, the Fed doesn’t expect inflation to slow enough to get close to its 2% target well into 2024. The central bank is expected to hike interest rates by at least a quarter point at its next meeting in late 2020 this month.
Excluding volatile food and energy costs, so-called core prices rose 5.7% year-on-year in December, slower than the 6% year-on-year increase in November. From November to December, core prices rose just 0.3%, the third straight monthly slowdown after rising 0.2% in November.
Even as inflation gradually slows, it remains a painful reality for many Americans, especially given necessities like food, energy and rents, which have risen sharply over the past 18 months.
Food prices rose 0.2% from November to December, the smallest such increase in almost two years. Nevertheless, these prices have risen by 11.8% compared to the previous year.
Falling gas prices are behind much of the decline in headline inflation. The national median price for a gallon of gasoline fell to $3.27 on Wednesday from $5 in June, according to the AAA.
Also contributing to the slowdown are used car prices, which fell for the sixth straight month in December. New car prices also fell. The cost of airline tickets and personal hygiene such as haircuts also went down.
Supply chain issues that previously drove up the cost of goods have largely resolved themselves. Consumers have also shifted much of their spending away from physical goods and towards services such as travel and entertainment instead. As a result, the cost of goods, including used cars, furniture and clothing, has fallen for two straight months.
Last week’s jobs report for December confirmed the possibility that a recession could be avoided. Even after the Fed raised interest rates seven times last year and with inflation still high, employers added a solid 223,000 jobs in December and the unemployment rate fell to 3.5%, a 53-year low.
At the same time, average hourly wage growth slowed, which should ease the pressure on firms to raise prices to meet higher labor costs.
Another positive sign of the Fed’s efforts to curb inflation is that Americans as a whole expect inflation to ease over the next few years. This is important because so-called “inflation expectations” can be self-fulfilling: if people expect prices to keep rising sharply, they will typically take steps, such as demanding higher wages, that can sustain high inflation.
On Monday, the Federal Reserve Bank of New York said consumers now expect inflation to hit 5% next year. That’s the lowest such expectation in nearly 18 months. Over the next five years, consumers are expecting inflation to average 2.4%, just slightly above the Fed’s 2% target.
Nonetheless, comments by Fed officials over the past few weeks have underscored their intention to raise its short-term benchmark interest rate by another three-quarters point to just over 5% in the coming months. Such hikes would come on top of seven hikes last year, nearly doubling mortgage rates and making auto and corporate loans more expensive.
Futures prices show that investors expect the central bank to become less aggressive, raising just two quarter-points through March, keeping the Fed interest rate just under 5%. Investors also expect the Fed to cut rates in November and December, according to the CME FedWatch Tool.
Fed Chair Jerome Powell has tried to dodge expectations of fewer rate hikes this spring and cuts by the end of the year, which can complicate the Fed’s job when investors push stock prices higher and bond yields lower. Both trends can support faster economic growth just as the Fed is trying to cool it down.
Minutes from the Fed’s December meeting noted that none of the 19 policymakers plan to cut interest rates this year.
Still, James Bullard, President of the Federal Reserve Bank of St. Louis, last week expressed some optimism that this year “actual inflation is likely to follow inflation expectations to lower levels,” suggesting that 2023 will be a “year of disinflation”.