Rising consumer prices in the United States moderated again in December amid declining costs for gasoline and motor vehicles, offering hope that inflation was now on a sustained downward trend, though the labor market remains tight.
The government said Thursday that inflation declined to 6.5% in December compared with a year earlier, marking the smallest rise since October 2021. However, it was the sixth straight year-over-year slowdown, down from 7.1% in November.
Every month, the consumer price index (CPI) slipped 0.1% from November to December, the first such drop since May 2020, when the economy was reeling from the first wave of COVID-19 cases. Conversely, the CPI rose 0.1% in November.
Americans also got some relief at the supermarket, with the report from the Labor Department showing food prices posting their smallest monthly increase since March 2021. But rents remained very high, and utilities were more expensive.
The report could further allow the Federal Reserve (Fed) to scale back the pace of its interest rate increases next month. The U.S. central bank has been engaged in its fastest rate hiking cycle since the 1980s.
"The mountain peak of inflation is behind us, but the question is how steep the downhill is," said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles.
"To be sure, the efforts by the Federal Reserve have begun to bear fruit, even though it will be a while before the promised land of a 2% inflation rate is here."
Economists polled by Reuters had forecast the CPI to remain unchanged. However, it was the third month that the CPI came in below expectations.
Gasoline prices tumbled 9.4% after dropping 2.0% in November. But the cost of natural gas increased by 3%, while electricity rose by 1%. Food prices climbed 0.3%, the smallest gain since March 2021, after rising 0.5% in the prior month. The cost of food consumed at home increased by 0.2%.
The annual CPI peaked at 9.1% in June, which was the most significant increase since November 1981. Inflation remains well above the Fed's 2% target.
Price pressures are subsiding as higher borrowing costs, tremendous demand, and bottlenecks in the supply chains ease. Last year, the Fed raised its policy rate by 425 basis points from near zero to a 4.25%-4.50% range, the highest since late 2007. In December, it projected at least 75 basis points of hikes in borrowing costs by the end of 2023.
Excluding the volatile food and energy components, the CPI climbed 0.3% last month after rising 0.2% in November. In the 12 months through December, the so-called core CPI increased by 5.7% after advancing by 6% in November.
Goods deflation
Prices for used cars and trucks fell 2.5%, recording their sixth straight monthly decline. Likewise, new motor vehicles slipped by 0.1%.
Goods prices dropped 1.1% after decreasing 0.3% in November as deflation in this category became entrenched. But services, the most significant component of the CPI basket, accelerated 0.6% after gaining 0.3% in November.
Sticky rents are driving them. Owners' equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, jumped 0.8% after rising 0.7% in November. Independent estimates, however, suggest rental inflation is cooling.
The rent measures in the CPI tend to lag the independent gauges. For example, healthcare costs gained 0.1% after two straight monthly declines. Even stripping out rental shelter, services inflation shot up 0.4% after being unchanged in November.
Still, Fed officials will welcome the moderation in inflation, though they will probably want to see more compelling evidence of waning price pressures before pausing rate hikes.
The labor market, which has remained tight, will be critical in this regard. The unemployment rate is back at a five-decade low of 3.5%. There were 1.7 jobs for every unemployed person in November.
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 205,000 for the week ended Jan. 7. Economists had forecast 215,000 shares for the latest week.
Part of the surprise drop in claims reflects challenges in adjusting the data for seasonal fluctuations at the start of the year. Nevertheless, shares have remained low despite high-profile layoffs in the technology industry and job cuts in interest rate-sensitive sectors like finance and housing.
Economists say companies are reluctant to send workers home after difficulties finding labor during the pandemic. They, however, expect claims to rise by the year's second half as higher borrowing costs choke demand and push the economy into recession.
The claims report also showed the number of people receiving benefits after an initial week of aid, a proxy for hiring, dropped 63,000 to 1.634 million in the week ending Dec. 31.
The government reported last week the economy created 223,000 jobs in December, more than double the 100,000 that economists say the Fed wants to see to be confident inflation is cooling.