As consumer prices fall, inflation declines; the labor market is still tight

U.S. consumer prices fell in December for the first time in more than 2 1/2 years amid lower gasoline and motor vehicle prices, giving hope that inflation is now on a steady downward trend. (Sarah Silbiger, Reuters)

Estimated reading time: 5-6 minutes

WASHINGTON – U.S. consumer prices fell for the first time in more than 2 1/2 years in December as gasoline and motor vehicle prices fell, giving hope that inflation is now on a steady downward trend, even as the labor market remains tight.

Americans also relaxed more at the supermarket last month, as a Labor Department report on Thursday showed grocery prices rose the smallest monthly since March 2021. But rents remained very high and utilities were more expensive.

Cooling inflation may allow the Federal Reserve to further reduce the pace of rate hikes next month. The US central bank is engaged in the fastest period of interest rate hikes since the 1980s.

“The mountaintop of inflation is behind us, but the question is how steep is the descent,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University in Los Angeles. “To be sure, the Fed’s efforts are beginning to bear fruit, although it will be some time before the promised 2% inflation rate is reached.”

The consumer price index fell 0.1% last month, the first drop since May 2020, when the economy was reeling from the first wave of COVID-19 cases. In November, the index increased by 0.1%.

Economists polled by Reuters had predicted that the price index would remain unchanged. It was the third straight month that the consumer price index fell below expectations, boosting purchasing power for consumers and hopes that the economy will avoid a feared recession this year.

“The current trajectory may provide for a softer recession, a stronger job market and a less aggressive Fed stance, but only time will tell,” said James Bentley, director of Financial Markets Online.

Gasoline prices fell 9.4% after falling 2.0% in November. However, the price of natural gas increased by 3.0%, and the price of electricity by 1.0%.

Food prices rose 0.3%, the smallest gain in nearly two years, after rising 0.5% the previous month. The cost of food consumed at home rose 0.2%, the lowest since March 2021. Fruit and vegetable prices have fallen, as have dairy products, but meat, poultry and fish cost more. Egg prices increased by 11.1% due to bird flu.

“Really breathing room”

CPI rose 6.5% in the 12 months to December. This was the smallest increase since October 2021 and followed a 7.1% advance in November. The annual consumer price index rose 9.1% in June, the largest increase since November 1981. Inflation remains well above the Fed’s 2% target.

President Joe Biden welcomed the disinflationary trend, saying it “gives families real breathing room” and “proves my plan is working.”

Higher borrowing costs ease pricing pressures as demand cools and supply chains ease.

The Fed last year raised its policy rate by 425 basis points to a near-zero range of 4.25% to 4.50%, the highest since late 2007. In December, it forecast at least another 75 basis points increase in borrowing costs before the end. The year 2023.

Excluding volatile food and energy components, the consumer price index rose 0.3% last month after rising 0.2% in November. In the 12 months to December, the core price index rose 5.7%. That was the smallest gain since December 2021 and followed a 6.0% advance in November.

Stocks were trading higher on Wall Street. The dollar fell against a basket of currencies. US Treasury prices rose.

Good deflation

Prices for used cars and trucks fell 2.5%, marking their sixth consecutive monthly decline. New motor vehicles fell 0.1% for the first time since January 2021.

The prices of basic goods decreased by 0.3% for the third straight month. Apparel prices rose even as retailers offered discounts to clear excess inventory. Services, the largest component of the consumer price index basket, accelerated 0.6% after gaining 0.3% in November, while goods deflation strengthened.

Basic services excluding energy rose 0.5% last month after rising 0.4% in November.

They are driven by sticky rents. Owner-equivalent rent, a measure of what landlords will pay in rent or earn from renting out their property, rose 0.8% after rising 0.7% in November. Independent measures show that rental inflation is cooling.

Rent measures in the consumer price index tend to lag behind independent measures. Health care spending rose 0.1% after two straight months of declines. Excluding rental housing, service inflation rose 0.4% after being flat in November.

The moderation in inflation will be welcomed by Fed officials, although they will likely want to see more convincing evidence that price pressures are easing before suspending rate hikes.

Labor market

Labor costs account for about two-thirds of the consumer price index. The labor market remains tight, with the unemployment rate returning to a five-decade low of 3.5% in December and 1.7 jobs for every unemployed person in November.

A separate report from the Labor Department showed that initial claims for state jobless benefits fell by 1,000 to a seasonally adjusted 205,000 in the week ended Jan. 7.

Economists had forecast 215,000 claims for the final week. Despite high-profile layoffs in the technology industry, as well as job cuts in interest rate-sensitive sectors such as finance and housing, claims have remained low.

Economists say companies are reluctant to send workers home after struggling to find workers during the pandemic. Claims data show that after the first week of aid, the number of people receiving benefits fell by 63,000 to 1.634 million in the week ended Dec. 31, a lawyer to hire.

The government said last week that the economy added 223,000 jobs in December, more than double the 100,000 the Fed wants to see to make sure inflation is cooling.

“Until labor supply and demand show better harmony, the Fed will be concerned about high inflation,” said Will Compernolle, chief economist at FHN Financial in New York.


Latest inflation stories

You may be interested in more stories

Source link