Inflation in the United States Continued to Slow for the Sixth Consecutive Month

Inflation in the United States eased in December for the sixth consecutive month, after reaching a peak in mid-2022. This was due to the aggressive interest rate hikes by the Federal Reserve, as well as signs that the economy was cooling down.

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The consumer-price index (CPI) measures how much consumers pay for goods and services. In December, the CPI rose 6.5% from the previous year, down from 7.1% in November. The CPI peaked at 9.1% in June but has been trending downward since then.

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Core CPI, which excludes volatile energy and food prices, climbed 5.7% in December from a year earlier, easing from a 6% gain in November. Many economists see increases in core CPI as a better signal of future inflation than the overall CPI. Core prices increased at a 3.1% annualized rate in the three months ended in December, the slowest pace in more than a year and down from 7.9% in June.

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The figures suggest that the Fed is likely to reduce the size of increases to its benchmark federal-funds rate to a quarter-percentage-point at their meeting that concludes on Feb. 1.

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U.S. stocks rose slightly on Thursday, as investors bought up U.S. Treasurys, driving bond prices up and yields down.

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Inflation has eased in recent months, following a number of signs that economic activity in the US has cooled off. Imports and exports both fell in November compared to the previous month, while retail sales, manufacturing output and home sales have all declined. Job and wage growth have both slowed in December, though the labor market remains tight with historically low levels of unemployment claims.

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"The December CPI report was a welcome piece of good news after a very tough stretch for inflation," said Bill Adams, chief economist at Comerica Bank. He said consumers are getting some relief from lower gasoline prices and moderating food prices, as well as declining prices for other goods.

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The CPI fell by 0.1% in December, due to a sharp drop in energy prices. This compared with a rise of 0.1% in November and 0.4% in October. Food prices also increased at a slower rate last month. Core CPI rose by 0.3% in December, up from November's 0.2% rise, but down from the 0.6% increases seen in August and September.
Goods prices have been a key driver of inflation over the past year and a half, but they fell for the third straight month in December. This was driven by lower prices for products such as autos, computers and sporting goods.

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Supply chain improvements and reduced demand have helped to ease pressure on prices for goods, but prices for services continue to rise in part due to wage increases in a tight labor market.
Some economists are concerned that continued high wage growth could keep consumers with plenty of cash and companies eager to raise prices to compensate, holding inflation above the Federal Reserve's 2% target.

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"The Fed's biggest challenge this year will be keeping inflation in check," said Ryan Sweet, chief U.S. economist at Oxford Economics.
Shelter prices rose 7.5% in December from a year earlier, according to the Labor Department. A broader measure of services prices that excludes utilities rose 7% during the same period. Both increases were the biggest since 1982.

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Daycare and preschool prices have been on the rise in recent years, with a 5.4% increase in December from the previous year. This is the biggest increase since 2006, and home-health care prices have also increased by 6.1% in the same period. Hospital services prices have also seen a sharp increase, with a 1.5% jump in December from the previous month. This is the sharpest monthly increase since 2015.

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Inflation remained high across the globe in November, though it abated during the month, the Organization for Economic Cooperation and Development said Tuesday. Consumer prices across the Group of 20 largest economies — which contribute four-fifths of economic output worldwide — rose 9% from a year earlier in November, down from October’s 9.5% increase. This is the first drop in the G-20 inflation rate since August 2021.

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Prices increased significantly in 2021 as the U.S. economy recovered from the Covid-19 pandemic, driven by pent-up consumer spending that was boosted by low interest rates and government stimulus. Snarled supply chains caused higher prices for many goods. Russia’s invasion of Ukraine in early 2022 also tightened supplies of energy and other commodities, further fueling inflation worldwide.

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Inflation pressures on goods eased last summer as supply chains improved and energy prices declined. Shipping costs from China to the West Coast are now near prepandemic levels. Gasoline prices have also fallen, with the national average price of regular unleaded gasoline at $3.27 a gallon on Thursday. This is down about 50 cents a gallon from mid-November, according to OPIS, an energy-data and analytics provider. Gasoline prices peaked in mid-June at a record $5.02 a gallon.

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"Logistics prices have also slowed materially, with shipping costs returning to pre-Covid levels," said Jake Oubina, senior economist at Piper Sandler. "This alleviation on the cost side is creating the wherewithal to discount more aggressively as we head into 2023."

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The most noticeable impact of the Federal Reserve's recent interest rate hikes has been on the housing market. Existing-home sales have fallen for 10 consecutive months as higher mortgage rates have made buying a home more expensive.

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Ian Snowden, a 33-year-old tech salesman, said that the shift to remote work after the pandemic hit allowed him to move to Asheville, N.C. He said that in Asheville he has easy access to hiking, fishing and other outdoor activities.

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The move ended up being quite expensive. After losing out to cash buyers in bids for existing homes, Mr. Snowden signed a contract in September 2021 to buy a newly constructed property. By the time his home was completed the following June, mortgage rates had doubled. On top of that, the construction company told him that he was responsible for an extra $25,000 to offset unexpectedly high costs for concrete, labor and other items—or he could back out of the contract.

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At that point, Mr. Snowden said, he had already made plans to sell his old house and move, so he wasn’t going to back out. “So much was already in motion,” he said. Between the higher mortgage rates and the additional costs, the monthly mortgage payment increased by $200, he said.