Inflation slowing down in December

Consumer prices slowed further in December, boosting hopes that the worst of red-hot inflation is behind the U.S.

The annual inflation rate fell from 7.1 percent in November to 6.5 percent in December, according to the consumer price index, released Thursday morning. Prices fell 0.1 percent last month after rising 0.1 percent in November.

Those figures — which are in line with analyst predictions — mark six straight months of receding annual price growth.

Excluding volatile food and energy prices, inflation rose 5.7 percent over the last 12 months ending in December and 0.3 percent on a month-to-month basis.

“Inflation is on its back heels. Consumer price inflation for December couldn’t have been much better,” Moody’s Analytics chief economist Mark Zandi tweeted.

Food prices rose 0.3 percent, down from 0.5 percent in November. Energy prices fell 4.5 percent in December after falling 1.6 percent in November.

But not everything was slowed: Shelter, meanwhile, rose 0.8 percent month-to-month, up from 0.6 percent in November.

The report is good news for consumers and Wall Street, which is hoping that falling prices will prompt the Federal Reserve to slow down its interest rate hikes.

Economists have warned that the Federal Reserve’s rate hikes could send the U.S. economy into a recession. But Fed officials have insisted that they will continue measures to bring down inflation to their target 2 percent rate.

“It’s important to keep in mind that there are costs and risks to tightening policy to lower inflation, but I see the costs and risks of allowing inflation to persist as far greater,” Federal Reserve board member Michelle Bowman said Tuesday.

Inflation Slowing in All the Right Places

The December inflation report had similar patterns to November and October. The price of goods, e.g., any physical item you might buy in a store or online, declined. Services prices were held up only by the Shelter component, basically the cost of renting or owning a home. Because of the Labor Department’s technique to measure both items, the Shelter component tends to lag reality. For example, according to the Case Shiller Home Price index, the average price of a single-family house has declined by 2.4% since June. However, the home price component of the CPI has risen by 4.3% over the same period.

We know that reality is going to catch up with the Shelter component. Right now, the Shelter component is one of the fastest-rising segments in the CPI. However, it could soon be one of the slowest. As this happens, we believe Core CPI will continue its slowing trend.

Will the Fed be Ready to Pause?

For the last few months, we have suggested that the Federal Reserve could pause rate hikes as soon as March 2023. While this CPI report does not make that a guarantee, it certainly helps.

Earlier, we mentioned that Core CPI has risen at a pace of 3.1% in the last three months. While that is still above the Fed’s 2% target, the Fed has suggested they may be willing to stop hiking rates around that level. The Fed’s policy committee members released a set of their own projections in December. For calendar 2023, they projected core inflation would be 3.5%. This same set of projections suggests most members want to stop rate hikes sometime in the first half of 2023.

These projections give us clues about how the Fed might react to a given economic outcome. Specifically, they are saying that if core inflation were running about 3.5%, they would be willing to stop hiking rates. But, as we said, inflation is already running at about 3.1%. So the Fed may want to see a couple more months of softer prices to feel confident in this trend. That would make March the right time for the Fed to stop hiking rates.

Sources