WASHINGTON (AP) – U.S. consumer price growth moderated again last month, raising hopes that inflation’s grip on the economy will continue to ease this year and may require less drastic action by the Federal Reserve to reduce it.
Inflation fell to 6.5 percent in December from a year earlier, the government said Thursday. It was the sixth consecutive year-over-year slowdown, down from 7.1% in November. On a month-over-month basis, prices actually fell 0.1% from November to December, the first such decline since May 2020.
The weaker readings add to growing signs that the worst inflation crisis in four decades is abating. Gas prices, which have fallen, will continue to reduce headline inflation in the coming months. The confusion of the supply chain has been largely untangled, helping to reduce the cost of goods ranging from cars and shoes to furniture and sporting goods.
December’s lower inflation reading has the Fed slowing rate hikes in the coming months. The Fed could raise its key rate by just a quarter of a point at its next meeting, which ends on February 1, after a half-point hike in December and four three-quarter point hikes earlier.
Fed officials have signaled that they plan to raise their key rate above 5 percent, a move that would likely keep mortgage rates high, along with the costs of auto loans and business loans. The Fed’s higher rates are meant to slow spending, cool the economy and reduce inflation.
If inflation continues to fall, the Fed could hold off on further rate hikes, some economists predict, or implement another hike in March and then stop. Futures prices show investors expect the Fed to cut rates later this year, even though minutes of the December meeting found that none of the 19 policymakers expected rate cuts this year.
“If real inflation comes down, the Fed can be more confident that it has put the economy in a good place,” said Daleep Singh, chief global economist at PGIM Fixed Income and a former Fed employee. Singh expects the Fed to raise its key rate by a quarter point at each of the next two meetings and then stop with the key rate just below 5 percent.
Excluding volatile food and energy costs, so-called core prices rose 5.7 percent in December year-on-year, slower than 6 percent in November. From November to December, core prices rose just 0.3 percent, after rising 0.2 percent in November. Over the past three months, core inflation has fallen at an annual rate of just 3.1%.
Even though inflation is gradually easing, it remains a painful reality for many Americans, especially with staples like food, energy and rent rising over the past 18 months.
Food prices rose 0.2 percent from November to December, the slowest such increase in nearly two years. However, those prices were up 11.8% from a year ago.
Behind most of the decline in headline inflation is lower gas prices. The national average price of a gallon of gasoline fell from $5 in June to $3.27 on Wednesday, according to AAA.
Also contributing to the slowdown are used car prices, which fell for the sixth consecutive month in December. New car prices have also fallen. The cost of plane tickets has also come down.
Last week’s December jobs report argued that a recession could be avoided. Even after seven Fed rate hikes last year and with inflation still high, employers added as many as 223,000 jobs in December and the unemployment rate fell to 3.5 percent, the lowest in 53 years.
At the same time, growth in average hourly wages has slowed, which should reduce pressure on companies to raise prices to cover their higher labor costs.
“The evidence that the US economy could avoid recession is growing,” Singh said.
Another positive sign for the Fed’s efforts to curb inflation is that Americans generally expect price increases to moderate over the next few years. This is important because so-called “inflationary expectations” can be self-fulfilling: if people expect prices to continue to rise sharply, they will usually take action, such as demanding higher wages, which can perpetuate a high inflation.
The Federal Reserve Bank of New York said Monday that consumers now expect inflation of 5 percent next year. This is the lowest expectation in nearly 18 months. Over the next five years, consumers expect inflation to average 2.4%, just above the Fed’s 2% target.
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