Inflation eased again in December, giving relief to households and businesses nationwide and offering more assurance to economic policymakers that steep price increases are pulling back without triggering massive consequences for the broader economy — so far.
The latest inflation data, released Thursday by the Bureau of Labor Statistics, showed prices were 6.5 percent higher in December than they were a year before — and fell 0.1 percent compared with November, the first time prices have dropped month over month since May 2020. The annual rate of price increases was the slowest since October 2021. Inflation is still well above normal levels, and the economy remains vulnerable to shocks that could send prices back up. But officials and American families have been desperate for signs that the Federal Reserve’s fight against inflation is working and that the economy, especially the labor market, will continue to stabilize in 2023.
“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 U.K. 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 U.K. are still raising interest rates but have slowed their pace.
“What we saw in the inflation data is that what [the Fed] is doing is working,” said Betsey Stevenson, an economist at the University of Michigan and a member of the Council of Economic Advisers in the Obama administration. “And so far, it hasn’t slowed the economy so much that we’ve seen net losses in jobs.”
Housing costs continue to go up, rising 7.5 percent over the past year and accounting for more than half of the total increase in a measure known as “core inflation,” which strips out more-volatile categories such as food and energy. Specifically, rents climbed 0.8 percent in December, as they had in November.
Other notable increases included household furnishings and operations (up 6.7 percent), medical care (up 4 percent) and new vehicles (up 5.9 percent).
Economists have many ways to look under the hood of the inflation report to tease out whether supply chains are improving or worker shortages are putting pressure on prices. Wendy Edelberg, the director of the Hamilton Project and a senior fellow in economic studies at the Brookings Institution, a center-left D.C.-based think tank, said she has been particularly focused on goods prices, which soared earlier in the pandemic as people shifted their spending from services to things. That could mean eating out less at restaurants, and instead getting new kitchen equipment.
Meanwhile, the cost of every single thing Andersson needs to run his shop has gone up, including gloves, paper towels and medical supplies. Yet, he hasn’t raised prices, because “if we raise the price, we lose the clients.” Andersson has seen a pickup in business since the year began, possibly driven by customers who got gift cards or cash over the holidays. He hopes the trend sticks.
“Our business itself — it’s not like groceries. So when the economy gets hit, it’s not necessary,” Andersson said. “If people don’t have extra money, they’re not going to get a tattoo. They’re going to feed their family.”
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