The pace of rising consumer prices in the US slowed down once more this month, raising hopes that the economy’s grip on inflation could loosen this year and necessitate less drastic intervention from the Federal Reserve to manage it.
Compared to a year ago, inflation decreased to 6.5% in December, the government reported on Thursday. It was the sixth consecutive deceleration from the previous year. Prices actually decreased 0.1% from November to December on a monthly basis, the first decrease of this kind since May 2020.
The weaker readings are further evidence that the worst inflation wave in four decades is gradually abating. However, the Fed doesn’t anticipate that the inflation would go down sufficiently to approach its 2% target until long after 2024. When it meets again at the end of the month, the central bank is anticipated to increase its benchmark rate by at least a quarter percent.
Even as it gradually slows, inflation continues to be an unpleasant reality for many Americans, particularly given the recent increases in the cost of basic needs like food, electricity, and rent.
As of Wednesday, the national average gas price was $3.27 per gallon, down from a peak of $5 per gallon in June. This indicates that inflation is currently reducing.
Supply chain bottlenecks that once drove up the price of goods have largely been resolved. Additionally, consumers are spending more on services like travel and entertainment rather than on tangible things. Because of this, the price of items, such as second-hand automobiles, furniture, and apparel, has decreased for two consecutive months.
The December jobs report released last week increased the likelihood that a recession could be avoided. Employers added a healthy 223,000 jobs in December despite the Fed’s seven rate hikes last year and the inflation rate remaining high, and the unemployment rate dropped to 3.5%, matching the lowest level in 53 years.
The demand on businesses to raise prices to compensate their greater labour costs should reduce as the growth in average hourly pay slowed at the same period.
The fact that most Americans anticipate a drop in price rises over the coming years is another encouraging indicator for the Fed’s efforts to combat inflation. This is crucial because people’s so-called “inflation expectations” can become self-fulfilling: If they believe that prices will continue to rise quickly, they are more likely to take actions like demanding higher wages that could prolong high inflation.
The Federal Reserve Bank of New York reported on Monday that consumers now expect inflation to be 5% over the coming year. This expectation is at its lowest level in almost 18 months. Consumers forecast inflation to average 2.4% over the next five years, just above the Fed’s 2% target.
However, Fed officials have made clear in recent weeks that they intend to increase their benchmark short-term rate by a further three-quarters of a point in the upcoming months to little more than 5%. These price spikes would be added to the seven hikes that occurred last year, which nearly doubled mortgage rates and increased the cost of borrowing for businesses and automobiles.
The Fed’s rate will be slightly below 5% by March, according to futures pricing, which indicate that investors expect the central bank to be less active and implement just two quarter-point raises. According to the CME FedWatch Tool, investors also anticipate that the Fed will lower rates in November and December.
The anticipation of fewer rate hikes this spring and reductions by the end of the year has been resisted by Fed Chair Jerome Powell, which may make the Fed’s task more difficult if investors drive up stock prices and drive down bond yields. Just as the Fed is attempting to slow it down, both tendencies have the potential to foster greater economic growth.
None of the 19 officials predicted rate reduction this year, according to the minutes from the Fed’s meeting in December.
However, James Bullard, president of the Federal Reserve Bank of St. Louis, voiced some hope last week that this year “actual inflation would likely follow inflation expectations to a lower level,” suggesting that 2023 might be a “year of disinflation.”