US inflation eased as consumer prices fell; The job market is still tight

WASHINGTON (Reuters) – U.S. 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, though the job market remains tight.

Americans also felt some relief at the supermarket, where a report from the Labor Department on Thursday showed food prices posted the smallest monthly increase since March 2021. But rents remained too high and utilities were more expensive.

The report 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 Consumer Price Index rose 0.1% in November.

Economists polled by Reuters had expected the consumer price index to be unchanged. It was the third consecutive month that the CPI came in below expectations.

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 lowest rise since March 2021, after rising 0.5% in the previous month. The cost of food consumed at home increased by 0.2%.

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 CPI peaked at 9.1% in June, the largest increase since November 1981. Inflation remained well above the Fed’s 2% target.

Price pressures are easing as lower borrowing costs reduce demand and relieve bottlenecks in supply chains. 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 CPI rose 0.3% last month after rising 0.2% in November. In the 12 months through December, the so-called core CPI rose 5.7% after advancing 6.0% in November.

US stocks opened higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.

Cargo unloading

Used car and truck prices fell 2.5%, marking their sixth consecutive monthly decline. New cars fell 0.1%.

Commodity prices fell 1.1% after falling 0.3% in November as deflation took hold in this category. But services, the largest item in the CPI basket, accelerated 0.6% after rising 0.3% 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.

Rent measures in the CPI tend to lag independent measures. Health care costs rose 0.1% after two consecutive monthly declines. Even after stripping rented shelter, service inflation rose 0.4% after remaining unchanged in November.

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

The labor market, which has remained tight, will be key in this regard. The unemployment rate has returned to 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 that initial claims for state unemployment benefits fell by 1,000 to a seasonally adjusted 205,000 for the week ending Jan. 7. Economists had expected 215,000 claims for the final week.

Part of the sudden decline in claims reflects the challenges of adjusting the data for seasonal fluctuations at the beginning of the year. However, claims remained low despite high-profile 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 work during the pandemic. However, they expect claims to rise by the second half of the year as higher borrowing costs stifle demand and push the economy into recession.

The claims report also showed that the number of people receiving benefits after an initial week from Help, which is 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 economists say the Fed wants to see inflation subside.

(Reporting by Lucia Motecani) Editing by Chizu Nomiyama and Andrea Ricci

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