Consumer prices in the United States fell for the first time in more than 2.5 years in December amid falling gasoline and motor vehicle prices, raising hopes that inflation was now following a sustained downward trend. (Sarah Silbiger, Reuters)
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WASHINGTON — U.S. consumer prices fell for the first time in more than 2.5 years in December amid falling gasoline and motor vehicle prices, raising hopes that inflation was now on a sustained downward trend, although the labor market remains tight.
Americans also got more relief at the supermarket last month, with the Labor Department report on Thursday showing food prices posting their smallest monthly increase since March 2021. But rents remained sky-high and utilities were down. more expensive.
Slowing inflation could allow the Federal Reserve to further reduce the pace of its interest rate hikes next month. The U.S. central bank is engaged in its fastest rate hike cycle since the 1980s.
“The peak 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. “Certainly the Fed’s efforts have started to bear fruit, although it will still be some time before the promised land of a 2% inflation rate is there.”
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. The index rose 0.1% in November.
Economists polled by Reuters had forecast the price index unchanged. It was the third month in a row that the consumer price index came in below expectations and boosted consumer spending power as well as hope that the economy could avoid a dreaded recession this year.
“The current trajectory could offer a soft landing, 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. But the cost of natural gas rose 3.0%, while the cost of electricity rose 1.0%.
Food prices rose 0.3%, the smallest increase in nearly two years, after increasing 0.5% 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 dear. The price of eggs jumped 11.1% due to the bird flu.
“Real leeway”
In the 12 months to December, the CPI rose 6.5%. This was the smallest increase since October 2021, and followed a 7.1% advance in November. The annual consumer price index peaked at 9.1% in June, the largest increase since November 1981. Inflation remains well above the Fed’s 2% target.
President Joe Biden hailed the disinflationary trend, saying it “gave families real breathing room” and “proof that my plan is working.”
Pricing pressures are easing as higher borrowing costs cool demand and supply chains loosen.
Last year, the Fed raised its policy rate by 425 basis points, from near zero to a range of 4.25% to 4.50%, the highest since the end of 2007. In December, it predicted at least another 75 basis points of borrowing cost hikes by the end. of 2023.
Excluding the volatile components of food and energy, the consumer price index rose 0.3% last month after rising 0.2% in November. In the 12 months ending in December, the so-called Core Price Index rose 5.7%. This was the smallest gain since December 2021, and followed a 6.0% gain in November.
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury prices rose.
Good definition
Prices for used cars and trucks fell 2.5%, their sixth consecutive monthly decline. New motor vehicles fell 0.1%, down for the first time since January 2021.
Prices for basic goods slipped 0.3%, down for a third consecutive month. Clothing prices rose despite discounts offered by retailers to eliminate excess inventory. As goods deflation takes root, services, the largest component of the consumer price index basket, accelerated 0.6% after gaining 0.3% in November.
Basic services, which exclude energy, rose 0.5% last month after rising 0.4% in November.
They are driven by sticky rents. Equivalent landlord rent, a measure of how much landlords would pay to rent or earn by renting their property, jumped 0.8% after rising 0.7% in November. Independent measures, however, suggest that rental inflation is slowing.
Measures of rents in the Consumer Price Index tend to lag independent gauges. Health care costs rose 0.1% after two consecutive monthly declines. Excluding rental housing, inflation for services rose 0.4% after remaining unchanged 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 halting rate hikes.
labor market
Labor costs represent about two-thirds of the consumer price index. The labor market remains tight, with the unemployment rate falling to its lowest level in five decades, at 3.5% in December, and 1.7 jobs for every unemployed person in November.
A separate Labor Department report showed initial claims for state unemployment benefits fell from 1,000 to 205,000 seasonally adjusted for the week ending Jan. 1. 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 currently reluctant to send workers home after struggling to find labor during the pandemic. The number of people receiving benefits after a first week of help, a proxy for employment, fell by 63,000 to 1.634 million in the week ending December 21. 31, claims data showed
The government announced last week that the economy added 223,000 jobs in December, more than double the 100,000 the Fed wants to see to ensure inflation slows.
“Until labor supply and demand show better harmony, the Fed will worry about the impending arrival of higher inflation,” said Will Compernolle, senior economist. at FHN Financial in New York.
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