Food and energy
Inflation continued to slow on an annual basis in December, a welcome relief for American households and a positive development for the Federal Reserve and policymakers at the White House.
The consumer price index rose 6.5 percent through last month, down from November’s estimate of 7.1 percent, as prices eased slightly on a monthly basis. The annual inflation rate was the slowest since October 2021 Gas prices are down And airfares have dropped.
Economists and central bank officials are focusing more on the so-called core inflation measure, which strips out food and fuel prices to get a sense of underlying price trends. That measure rose 5.7 percent from a year earlier in December, compared with 6 percent earlier and in line with what forecasters had expected.
The takeaway is that inflation is meaningfully moderate. But the key question now is how quickly and fully it will return to normal after an unusually long year and a half, and policymakers are wary that full depreciation could be a long process.
For the central bank, the inflation report confirms that the slowdown in price gains expected by officials will be fruitful. Based on that, the statistics could help policymakers feel comfortable slowing down the pace of their rate hikes. Officials scaled back their rate moves in December clarified They could dial back in February — adjusting policy one quarter (also known as 25 basis points) at a time — rather than continuing with the more drastic changes they’ve made through 2022.
“I expect we will raise rates a few more times this year, although, in my mind, the days of raising rates 75 basis points at once are certainly over,” said Patrick Harker, president of the Federal Reserve Bank of Philadelphia. , said in a speech on Thursday. “In my view, hikes of 25 basis points would be appropriate going forward.”
But the new inflation data does little to suggest that the problem of rapid inflation has been fully resolved, so central bankers will likely raise borrowing costs slightly more in the coming months to keep inflation fully under control. .
A number of factors should help moderate price increases this year. A rebound in commodity price inflation is expected to help moderate overall inflation this year. Rising rental costs pushed up inflation in December and may lift inflation for a while, but that is expected to reverse in mid-2023. Rents for newly leased apartments have started rising more slowly, which could feed into the government’s official inflation measure over time, according to private data.
But central bankers are watching closely what happens to prices for other services, including hotel rooms, sporting event tickets and health care. They worry that services inflation — which is unusually fast — could push up prices faster than the central bank’s target. The central bank aims for an average inflation rate of 2 percent, using a different but related price measure from the Consumer Price Index.
Prices of core services excluding household expenses, a measure closely watched by both the central bank and economists, rose 0.3 percent in December on a monthly basis. It was 0.1 percent in November, according to calculations by Omair Sharif, founder of Inflation Intelligence.
“What we’ve done is create a core out of inventory inflation,” Mr. Harker said in a question-and-answer session following his speech. “Service Inflation Ex-Shelter Runs Even Higher.”
Many central bankers think to get Inflation of services Under control, they should slow the job market and reduce wage gains. Otherwise, companies facing large labor bills will continue to pass those costs on to consumers.
“The biggest cost in that sector is labor,” said Fed President Jerome H. Powell said in his latest statement. News conference In December. “Also, we’re seeing a very strong labor market where we’re not seeing much softening, where job growth is very high, where wages are very high.”
To cool the situation, central bankers raise interest rates and make borrowing more expensive for firms and households in an attempt to dampen demand and the broader economy.
Fed policymakers first Low interest rates increase In December after a series of rapid moves in 2022, they look poised to slow further in the February 1 rate cut. But even if price hikes cause some economic damage, they expect to raise rates at least a little more until they see solid evidence that inflation is moderating.