By | December 15, 2022
U.S. consumer prices fell for the first time in more than 2 1/2 years in December amid declining prices for gasoline and motor vehicles, offering hope that inflation was now on a sustained downward trend.

U.S. consumer prices fell for the first time in more than 2 1/2 years in December amid falling gasoline and motor vehicle prices, giving hope that inflation was now on a sustained downward trend. (Sarah Silbiger, Reuters)

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WASHINGTON – U.S. consumer prices fell for the first time in more than 2 1/2 years in December amid falling gasoline and motor vehicle prices, raising hopes that inflation was now on a continued downward trend, although the labor market remains tight.

Americans also got more relief at the grocery store last month, with the Labor Department report on Thursday showing grocery prices had their smallest monthly increase since March 2021. But rents remained very high and utilities were more expensive.

Cooling inflation could allow the Federal Reserve to further reduce the pace of its rate hikes next month. The US Federal Reserve is engaged in its fastest rate hike cycle since the 1980s.

“The mountaintop of inflation is behind us but the question is how steep the downhill is,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “To be sure, the efforts of the Fed have begun to bear fruit, although it will be some time before the promised land of a 2% inflation rate is here.”

The consumer price index fell 0.1% last month, the first decline since May 2020, as the economy reeled from the first wave of COVID-19 cases. The index rose 0.1% in November.

Economists polled by Reuters had forecast the price index unchanged. It was the third month in a row that the consumer price index came in below expectations, boosting consumer purchasing power and hopes that the economy could avoid a feared recession this year.

“The current trajectory could provide a softer landing, a stronger labor market and a less aggressive stance from the Fed, but only time will tell,” said James Bentley, director at Financial Markets Online.

Gasoline prices fell 9.4% after falling 2.0% in November. But the cost of natural gas rose 3.0%, while electricity rose 1.0%.

Food prices rose 0.3%, the smallest increase in nearly two years, after rising 0.5% the previous month. The cost of food consumed at home increased by 0.2%, also the least since March 2021. Fruit and vegetable prices fell, as did dairy prices, but meat, poultry and fish cost more. Egg prices rose by 11.1% due to bird flu.

“Some real breathing room”

In the 12 months to December, the CPI rose by 6.5%. That was the smallest increase since October 2021 and followed a 7.1% rise in November. The annual consumer price index peaked at 9.1% in June, the largest increase since November 1981. Inflation remains well above the Fed’s 2% target.

President Joe Biden welcomed the disinflationary trend, saying it “gives families real breathing room” and “proof that my plan is working.”

Price pressures ease as higher borrowing costs dampen demand and supply chains ease.

The Fed last year raised its key interest rate by 425 basis points from near zero to a range of 4.25%-4.50%, the highest since late 2007. In December, it forecast another 75 basis points of increases in borrowing costs by the end of 2023.

Excluding the volatile food and energy components, the consumer price index climbed 0.3% last month after rising 0.2% in November. In the 12 months to December, the so-called core price index increased by 5.7%. That was the smallest increase since December 2021 and followed a 6.0% gain in November.

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.

Good deflation

Prices for used cars and trucks fell 2.5%, posting their sixth consecutive monthly decline. New motor vehicles fell 0.1%, for the first time since January 2021.

Core commodity prices fell 0.3%, falling for the third month in a row. Clothing prices rose even as retailers offered discounts to clear excess inventory. While goods deflation is taking hold, services, the largest component of the CPI basket, accelerated 0.6% after rising 0.3% in November.

Core services, which exclude energy, rose 0.5% last month after rising 0.4% in November.

They are driven by sticky rents. Owner equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, rose 0.8% after rising 0.7% in November. However, independent measures suggest that rental inflation is cooling.

The rent measures in the consumer price index tend to lag behind the independent measures. Health care costs rose 0.1% after two straight monthly declines. Stripping out rental housing, services inflation rose 0.4% after being flat in November.

The easing of inflation will be welcomed by Fed officials, although they will probably want to see more convincing evidence that price pressures are easing before pausing rate hikes.

Labor market

Labor costs make up about two-thirds of the consumer price index. The labor market remains tight, with unemployment back to a five-decade low of 3.5% in December and 1.7 jobs for every unemployed person in November.

A separate Labor Department report showed initial claims for state jobless benefits fell by 1,000 to a seasonally adjusted 205,000 for the week ended Jan. 7.

Economists had forecast 215,000 claims in the past week. Claims have remained low despite high-profile layoffs in the technology industry as well as cutbacks in interest-rate-sensitive sectors such as finance and housing.

Economists say companies are currently reluctant to send workers home after struggling to find workers during the pandemic. The number of people receiving benefits after a first week on assistance, a proxy for employment, fell by 63,000 to 1.634 million in the week ended Dec. 31, claims data showed

The government reported last week that the economy added 223,000 jobs in December, more than double the 100,000 the Fed wants to see to be confident inflation is cooling.

“Until labor supply and demand show better harmony, the Fed will worry that higher inflation is just around the corner,” said Will Compernolle, senior economist at FHN Financial in New York.

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