inflation recedes as consumer prices fall; The job market is still tight

US consumer prices fell for the first time in more than two and a half years in December amid lower gasoline and auto prices, giving hope that inflation was now on a sustained downward trend. (Sarah Silbiger, Reuters)

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WASHINGTON – US consumer prices fell for the first time in more than two and a half years in December amid lower gasoline and auto prices, giving hope that inflation On a continuing downward trend, although the job market remains tight.

Americans also got more convenience at the supermarket last month, as a report from the Labor Department on Thursday showed that food prices posted the smallest monthly increase since March 2021. But rents remained very high and utilities were more expensive.

Cooling inflation may allow the Federal Reserve to scale back interest rate increases next month. The US central bank is participating in the fastest rate hike cycle since the 1980s.

“We’re past the peak of the mountain for inflation, but the question is how steep,” said Song Won-soon, professor of finance and economics at Loyola Marymount University in Los Angeles. “The Fed’s efforts are certainly beginning to bear fruit, although it will be some time before the promised land of 2% inflation hits here.”

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

Economists polled by Reuters had expected the price index to remain unchanged. It was the third month in a row that the CPI came in below expectations and lifted consumers’ purchasing power as well as hopes that the economy could avoid a dreaded recession this year.

“The current path could offer a softer landing, a stronger jobs 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 declining 2.0% in November. But the cost of natural gas increased 3.0%, while electricity rose 1.0%.

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

“A real breathing room”

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

President Joe Biden has welcomed the anti-inflationary trend, saying it “gives families real breathing space” and “proof that my plan works.”

Price pressures recede as borrowing costs drop in demand, and supply chains ease.

The Fed raised its policy rate last year by 425 basis points from nearly zero to a range of 4.25%-4.50%, the highest since late 2007. In December, it expected at least an additional 75 basis points of increases in borrowing costs by the end of the year 2023.

Excluding the volatile food and energy components, the consumer price index rose 0.3% last month after rising 0.2% in November. In the twelve months through December, the so-called core price index increased by 5.7%. This was the smallest gain since December 2021 and followed a 6.0% rise in November.

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

good shrinkage

Used car and truck prices fell 2.5%, marking their sixth consecutive monthly decline. New cars fell 0.1 percent, declining for the first time since January 2021.

Commodity prices fell 0.3%, down for the third month in a row. Clothing prices rose despite retailers offering discounts to clear excess inventory. While the contraction in goods became entrenched, services, the largest component in the CPI basket, accelerated 0.6% after rising 0.3% in November.

Essential services, which exclude energy, rose 0.5% last month after increasing 0.4% in November.

They are paid with sticky rents. Owner’s equivalent rent, a measure of the amount homeowners will pay for rent or earn from renting their properties, jumped 0.8% after rising 0.7% in November. However, independent measures indicate that rent inflation is cooling.

Measures of rent in the CPI tend to lag behind the independent measures. Health care costs rose 0.1% after two consecutive monthly declines. After removing rental housing, service inflation rose 0.4% after remaining unchanged in November.

Fed officials would welcome moderation in inflation, although they would probably like to see more convincing evidence of easing price pressures before pausing rate hikes.

Labor market

Labor costs account for about two-thirds of the consumer price index. The job market remains tight, with the unemployment rate back at a five-decade low of 3.5% in December, and 1.7 jobs per unemployed person in November.

A separate report from the Labor Department showed that initial claims for state unemployment benefits fell by 1,000 to a seasonally adjusted 205,000 for the week ending January 7th.

Economists had expected 215,000 claims in the last week. Claims remained low despite notable layoffs in the technology industry as well as job cuts in interest rate sensitive sectors such as finance and housing.

Economists say companies are currently reluctant to send workers home after difficulties finding workers during the pandemic. Claims data showed the number of people receiving benefits after an initial week from Help, a proxy for employment, fell by 63,000 to 1.634 million in the week ending Dec. 31.

The government reported last week that the economy created 223,000 jobs in December, more than double the 100,000 that the Fed wants to see inflation subside.

“Until labor supply and demand show better alignment, the Fed is going to worry that a spike in inflation is about to happen,” said Will Cumbernall, chief economist at FHN Financial in New York.


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