US economic hopes rise as inflation drops in Dec.
Lower figures crack door for Fed to slow interest rate hikes
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% in December compared with a year earlier, the government said Thursday. It was the sixth consecutive yearover-year slowdown, down from 7.1% in November.
On a monthly basis, prices 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%.
President Joe Biden suggested that the “data is clear” that U.S. inflation is dropping.
“It’s coming down in America month after month, giving families some real breathing room,” he said Thursday.
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.
Excluding volatile food
and energy costs, so-called core prices rose 5.7% in December from a year earlier, slower than 6% in November. From November to December, core prices increased 0.3%, after rising 0.2% in November. In the past three months, core inflation has slowed to an annual rate of 3.1%.
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% from November to December, the smallest such increase in nearly two
years. Still, those prices are up 11.8% 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, according to AAA.
Also contributing to the slowdown are used car prices, which fell for a sixth consecutive month in December. New car prices declined too.
Still, for most Americans, the Fed’s rate hikes have made auto loans much more expensive.
Most economists predict that inflation will continue easing in the coming
months, driven down by cheaper gasoline and factory goods.
Housing costs are still surging, with apartment rental costs jumping 0.8% from November to December and 8.3% compared with a year earlier. The year-overyear increase was the fastest in four decades.
But real-time measures of new leases tracked by real estate data firms like Zillow and Apartment List show that rental price increases are slowing. As a result, the government’s measure of rents, which lag behind private measures, should start to decline later this year.