Inflation in U.S. eases grip on economy, falling for 6th month
WASHINGTON — Rising U.S. consumer prices moderated again last month, bolstering hopes that inflation's grip on the economy will continue to ease this year and possibly require less drastic action by the Federal Reserve to control it.
Inflation declined to 6.5 percent in December compared with a year earlier, the government said Thursday. It was the sixth straight year-over-year slowdown, down from 7.1 percent in November. On a monthly basis, prices actually slipped 0.1 percent from November to December, the first such drop since May 2020.
The softer readings add to growing signs that the worst inflation bout in four decades is steadily waning. Gas prices, which have tumbled, are likely to keep lowering overall inflation in the coming months. Supply chain snarls have largely unraveled. That's helping reduce the cost of goods ranging from cars and shoes to furniture and sporting goods.
“This is the starting point for much better inflation rates, which should bolster consumer and business confidence,” said Joe Brusuelas, chief economist at tax consultants RSM.
December's lower inflation reading makes it likelier that the Fed will slow its interest rate hikes in the coming months. The Fed may raise its benchmark rate by just a quarter-point at its next meeting, which ends Feb. 1, after a half-point increase in December and four three-quarter-point hikes before that.
Fed officials have signaled that they intend to boost their key rate above 5 percent — a move that would likely keep mortgage rates high, along with the costs of auto loans and business borrowing. The Fed's higher rates are intended to slow spending, cool the economy and curb inflation.
But if inflation continues to ease, the Fed could suspend its rate hikes after that, some economists say, or implement just one additional hike in March and then pause. Futures prices show that investors expect the Fed to then cut rates by year's end, although minutes from its December meeting noted that none of the 19 policymakers foresee any rate cuts this year.
“If actual inflation is trending downward, the Fed can take more comfort that it's landed the economy in a good place,” said Daleep Singh, chief global economist at PGIM Fixed Income and a former Fed staffer. Singh expects the Fed to raise its benchmark rate by a quarter-point at each of its next two meetings and then stop with its key rate just below 5 percent.
Inflation also has been dropping, though to a lesser degree, in Europe and in the United Kingdom. After months of rising prices, annual inflation in the 19 countries that use the euro currency fell for the second straight month in December but still hit a painful 9.2 percent. That was down from November's 10.1 percent, with energy prices having dropped from summertime peaks but still higher than normal.
While annual inflation in the U.K. eased to 10.7 percent in November from 11.1 percent a month earlier, it's still stuck near a 40-year high, with food and energy prices squeezing consumers. Central banks in Europe and the U.K. are still raising interest rates but have slowed their pace.
Excluding volatile food and energy costs, so-called core prices rose 5.7 percent in December from a year earlier, slower than 6 percent in November. From November to December, core prices increased just 0.3 percent, after rising 0.2 percent in November. In the past three months, core inflation has slowed to an annual rate of just 3.1 percent.
Even as inflation gradually slows, it remains a painful reality for many Americans, especially with such necessities as food, energy and rents having soared over the past 18 months.
Grocery prices rose 0.2 percent from November to December, the smallest such increase in nearly two years. Still, those prices are up 11.8 percent from a year ago.
Behind much of the decline in overall inflation are falling gas prices. The national average price of a gallon of gas has sunk from a $5 in June to $3.27 as of Wednesday, according to AAA.
Also contributing to the slowdown are used car prices, which fell for a sixth straight month in December. New car prices declined, too. The cost of airline tickets also dropped.