US inflation eases grip on economy
WASHINGTON — Rising US 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%, in December, compared with a year earlier, the government said, Thursday. It was the sixth straight year-over-year slowdown, down from 7.1%, in November. On a monthly basis, prices actually slipped 0.1%, 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%— 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%.
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%. That was down from November’s 10.1%, with energy prices having dropped from summertime peaks but still higher than normal.
While annual inflation in the UK eased to 10.7%, in November, from 11.1% 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 UK are still raising interest rates but have slowed their pace.
In remarks, Thursday morning, President Joe Biden suggested that the “data is clear” that US inflation is dropping.
“It’s coming down in America month after month, giving families some real breathing room,” he said.
Biden is increasingly framing the economic challenge of inflation in political terms: He warned that House Republicans could worsen inflation and inequality with their bills to reduce IRS funding and even eliminate the tax agency and instead levy a national sales tax that would disproportionately hit the middle class.