US consumer prices fell in December for the first time in more than 2 1/2 years amid falling gasoline and car prices, raising hopes of a continued downward trend in inflation. (Sarah Silbiger, Portal)
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WASHINGTON – US consumer prices fell in December for the first time in more than 2 1/2 years amid falling gas and auto prices, raising hopes that inflation is now on an ongoing downward trend, although the job market remains tight.
Americans were also relieved at the grocery store last month, with Thursday’s Labor Department report showing grocery prices posted the smallest monthly increase since March 2021. However, rents remained very high and utilities were more expensive.
Cooling inflation could allow the Federal Reserve to further slow the pace of its rate hikes next month. The US Federal Reserve is in its fastest rate hike cycle since the 1980s.
“The peak of inflation is behind us, but the question is how steep the descent is,” said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles. “Sure, the Fed’s efforts are beginning to bear fruit, although it will be a while before the promised land of 2% inflation is there.”
The consumer price index fell 0.1% last month, the first drop since May 2020, when the economy suffered from the first wave of COVID-19 cases. The index rose 0.1% in November.
Economists polled by Portal had forecast the price index unchanged. It was the third straight month that the CPI came in below expectations, boosting consumer spending power and hopes that the economy could avoid a feared recession this year.
“Current trajectory could result in a softer landing, a stronger job market and a less aggressive stance from the Fed, but only time will tell,” said James Bentley, director at Financial Markets Online.
Gasoline prices fell 9.4% after falling 2.0% in November. But the cost of natural gas rose 3.0%, while electricity rose 1.0%.
Food prices rose 0.3%, the smallest increase in nearly two years, after rising 0.5% in the previous month. The cost of food eaten at home rose 0.2%, also the least since March 2021. Fruit and vegetable prices fell, as did dairy, but meat, poultry and fish cost more. Egg prices rose 11.1% because of bird flu.
“Some real air to breathe”
In the 12 months to December, the CPI rose 6.5%. That was the smallest increase since October 2021 and followed a 7.1% rise in November. The annual consumer price index peaked at 9.1% in June, the sharpest increase since November 1981. Inflation remains well above the Fed’s 2% target.
President Joe Biden hailed the disinflationary trend, saying it “really gives families breathing room” and “proves my plan is working.”
Price pressures are easing as higher borrowing costs dampen demand and supply chains ease.
The Fed last year raised interest rates by 425 basis points from near zero to a range of 4.25% to 4.50%, the highest level since late 2007. In December, it forecast borrowing costs to rise by at least another 75 basis points by the end of 2023
Excluding the volatile food and energy components, the CPI rose 0.3% last month after rising 0.2% in November. In the 12 months to December, the so-called core price index rose by 5.7%. That was the smallest gain since December 2021 and followed a 6.0% gain in November.
Stocks on Wall Street traded higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.
Good deflation
Used car and truck prices fell 2.5%, posting their sixth consecutive monthly decline. New motor vehicles slipped 0.1%, falling for the first time since January 2021.
Core commodity prices slipped 0.3%, falling for the third straight month. Clothing prices rose even as retailers offered discounts to shed excess inventory. As goods deflation firmed, services, the largest component of the CPI basket, accelerated 0.6% after gaining 0.3% in November.
Core services, which exclude energy, rose 0.5% last month after rising 0.4% in November.
They are driven by sticky rents. The owner-equivalent rent, a measure of the amount homeowners would pay to rent or earn from renting out their property, rose 0.8% after rising 0.7% in November. However, independent measurements suggest that rental inflation is cooling.
The rental dimensions in the consumer price index tend to lag behind the independent indicators. Healthcare costs rose 0.1% after two consecutive monthly declines. Ex-rental accommodation, services inflation surged 0.4% after being flat in November.
Inflation moderation is being welcomed by Fed officials, although they will likely want to see more convincing evidence of easing price pressures before pausing rate hikes.
labour market
Labor costs account for about two-thirds of the consumer price index. The job market remains tight, with a 3.5% unemployment rate in December at a five-decade low and 1.7 jobs for each unemployed in November.
A separate Labor Department report showed that initial jobless claims fell by 1,000 to a seasonally adjusted 205,000 in the week ended Jan. 7.
Economists had forecast 215,000 claims for the past week. Claims have remained low despite high-profile layoffs in the tech industry, as well as job cuts in interest-rate-sensitive sectors like finance and housing.
Economists say companies are reluctant to send workers home for now after struggling to find workers during the pandemic. The number of people receiving benefits after an initial week of assistance, a stand-in for recruitment, fell by 63,000 to 1.634 million in the week ended December 31, claims data showed
The government reported last week that the economy added 223,000 jobs in December, more than double the 100,000 the Fed wants to see to be confident inflation is cooling.
“Until labor supply and demand show better harmony, the Fed will fear that higher inflation is just around the corner,” said Will Compernolle, senior economist at FHN Financial in New York.
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