Inflation in December 2022: A Breakdown

The inflation rate declined in December as consumers saw prices plummet at the gasoline pump. This provides another hopeful sign that price pressures are continuing to ease from their highest level in decades.
Inflation ended the year at 6.5% according to the consumer price index, the U.S. Bureau of Labor Statistics said Thursday. This was in line with what economists had predicted.
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The CPI reading for December marked the smallest 12-month increase since October 2021. It fell from 7.1% in November to 6.9% in December. This is the lowest 12-month inflation rate since October 2021.
The index is a measure of how quickly prices are rising or falling for a basket of goods and services. This basket can include items like consumer electronics, food, utilities, and tickets to sporting events.
A decline in the annual inflation rate doesn't necessarily mean that consumers experienced deflation, which is when overall prices decrease. The annual rate in December was still positive, meaning that prices rose, just at a slower pace than earlier in the year.
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The monthly inflation rate is a better gauge of short-term inflation trends than the annual rate. In December, the monthly inflation reading was negative, meaning that prices fell on average for American consumers relative to November. The last time this happened was in May 2020, when consumer demand collapsed in the early months of the Covid pandemic.
As expenses continue to stay high, more and more Americans are turning to credit cards to help make ends meet. If you're looking to get your finances in order this year, here are three money moves you should make at the start of the year. And if you're worried about the future of the bond market, 2022 was unfortunately the worst year on record for U.S. bonds.
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Mark Zandi, chief economist at Moody's Analytics, said that inflation is moderating quickly and is now on its back heels. He added that this is a positive development for the economy as a whole.
Zandi believes that inflation will not be a top concern for people when thinking about their finances next year.
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The annual inflation rate is still high, even though it has been declining recently. In June 2022, the inflation rate reached its peak for the pandemic era at 9.1%.
Prices for food at elementary and secondary schools are expected to grow rapidly in 2022, by 305%. Other items that are expected to see significant price increases include eggs (59.9%), margarine (43.8%), fuel oil (41.5%), and airline fares (28.5%).
Some of these prices increased dramatically for reasons beyond general pandemic-era inflationary factors such as snarled supply chains, pent-up consumer demand, household cash infusions, labor shortages and war in Ukraine.
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For example, the U.S. suffered its deadliest bird-flu outbreak in history last year, causing the death of millions of hens and pushing up egg prices dramatically. Global weather events and export bans in major vegetable-oil producers such as Indonesia, Canada and Brazil contributed to fast-rising margarine prices. Federal pandemic-era waivers for free school lunches, which were the root cause of the increase in food at schools, expired last year.
In contrast, some items had negative inflation rates in 2022. Those with the largest annual price declines included consumer electronics such as smartphones and TVs, for which prices fell by 22.2% and 14.4% in 2022, respectively. Car and truck rental prices fell by 4.9%, while beef and veal prices fell by 3.1%, women’s dresses by 2.3% and admission to sporting events by 1.5%.
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A decline in the inflation rate for electronics may seem counterintuitive when iPhones and other gadgets didn’t necessarily come with steep discounts in 2022. In fact, that “decline” on paper is due to how the federal government accounts for improvements in product quality over time. The government uses a method called hedonic quality adjustment, which takes into account the fact that newer products are often better than older ones in terms of features and quality. This means that, even though prices may not have fallen, the quality of the products has increased, leading to a lower inflation rate.
Other categories saw significant changes from November to December on a monthly basis.
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The largest contributor to overall deflation in December was a 9.4% decrease in gasoline prices, according to the CPI report. This average gas prices fell to $3.09 a gallon on Dec. 26, from $3.53 a month earlier, according to the Energy Information Administration.
The main reason for the decline in gas prices is lower global prices for crude oil. Oil prices have been falling due to concerns about a potential recession and weak energy demand. According to Andrew Hunter, senior U.S. economist at Capital Economics, this has caused a decline in gas prices.
Hunter said that the huge amount of inflation we had from rising gas prices has now almost completely reversed.
Other categories that saw declines in December included used cars and trucks (a 2.5% decrease), airline fares (3.1%), and new vehicles and personal care (each down 0.1%). That's according to the latest CPI report.
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The shelter index increased in May, with prices rising by 0.8%. This is up from 0.6% in April. However, signals indicate that housing costs have peaked and should start moderating in the CPI data by the summer and into the second half of the year, according to Zandi.
If inflation were to continue to moderate, it would be a welcome reprieve for households. The average person has lost purchasing power as their wages have grown at a slower pace than prices for the things they buy.
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According to the U.S. Department of Labor, hourly wages have fallen by 1.7% in the past year, after accounting for inflation. This means that workers are effectively earning less than they were a year ago, even when taking into account the rising cost of living.
According to a Moody's analysis of the annual inflation rate in December, the typical household needs to spend $371 more per month to buy the same goods and services they did last year.
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A healthy economy experiences a small degree of inflation each year. U.S. Federal Reserve officials aim to keep inflation around 2% annually. However, prices started rising at an unusually fast pace starting in early 2021, following years of low inflation.
As the U.S. economy reopened, a supply-demand imbalance fueled inflation that was initially limited to items such as used cars. However, this inflation has since spread and lingered longer than many officials and economists had expected.
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The problem of inflation is not limited to the United States. By the first quarter of 2022, average annual inflation rates had at least doubled from their pre-pandemic level in 37 out of 44 developed nations in the Organization for Economic Cooperation and Development, according to the Pew Research Center.
Inflation first showed up on the global stage in the U.S. That is partly due to Covid-related restrictions unwinding sooner in many states relative to the rest of the world and federal support for households kickstarting the economic recovery.
As the economy reopened, Americans had more disposable income, thanks to federal stimulus funds and pent-up demand from staying at home. However, Covid-19 lockdowns snarled global supply chains, resulting in fewer goods to buy and higher prices. Additionally, the war in Ukraine caused a spike in global energy costs, which fed into rising costs to produce and distribute goods.
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The dynamics that had been driving high inflation for physical goods seem to be retreating. Supply-chain issues have largely faded, while a strong U.S. dollar relative to foreign currencies generally makes it less costly to import goods from overseas.
Inflation for "services" has been a bit more difficult to manage. A big factor in this is labor costs. With demand for workers near historic highs and the unemployment rate low, businesses are competing for workers and wages are rising quickly. This puts upward pressure on the cost of services.
Economists generally prefer using a so-called "core" inflation measure to gauge inflationary trends in the U.S. economy. This measure of CPI assesses prices without food and energy, which can experience big swings up and down from month to month.
The monthly inflation rate excluding food and energy was 0.3% in December, up slightly from 0.2% in November. The main factor contributing to this increase was shelter, according to the CPI report.
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Housing costs are a major component of core inflation, and they make up the largest portion of average household budgets. The government’s measure of housing inflation is slow-moving, but private-sector data shows that rental growth is slowing down sharply. This trend should show up in the CPI over the coming months, according to Hunter.
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Zandi stated that, in addition to housing, inflation is cooling off rapidly and people are already starting to feel the benefits.