US inflation eases to 6.5% in December, the lowest in over a year

The United States is beginning to win the battle against inflation. Aggressive interest rate hikes by the Federal Reserve have cooled demand, and the effect has been compounded by falling oil prices in international markets. The decline in gasoline prices from pre-summer highs explains much of the drop in inflation.

Inflation at the close of 2022 stood at 6.5%, according to December data released on Thursday by the Bureau of Labor Statistics. This is the sixth consecutive drop in the year-on-year rate and it brings inflation to its lowest level since October 2021. With these new figures, the central bank will be able to keep slowing down the pace of rate hikes, as it did at the last meeting of its monetary policy committee.

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in December on a seasonally adjusted basis, after increasing 0.1 percent in November.

The index for gasoline was by far the largest contributor to the monthly all items decrease, more than offsetting increases in shelter indexes. The food index increased 0.3 percent over the month, with the food at home index rising 0.2 percent. The energy index decreased 4.5 percent over the month as the gasoline index declined; other major energy component indexes increased over the month.

Core inflation, which excludes energy and food prices for consumption at home, has also declined, although more moderately. It dropped from 6.0% in November to 5.7% at the end of the year.

The new data point is also a welcome relief for US President Joe Biden, whose popularity has been particularly damaged by the price increases. The White House has included a speech on the economy and the efforts to tackle inflation in the president’s agenda for Thursday.

Faced with labor shortages and difficulties in hiring, companies are thinking twice before laying off employees

The pace of price increases is still well above the Fed’s 2% price stability target, but it is a relief for Chairman Jerome Powell. It also comes on top of a moderation in the pace of wage increases, according to data released last week, which monetary policymakers are watching very closely to prevent a wage-price spiral that would cause inflation to become more entrenched than desired.

Over the past six months, inflation has come down from 9.1% in June, but it is not yet even halfway down to the central bank’s target. That is why the monetary policy committee expects to continue raising interest rates and to keep them high for as long as necessary. In a speech this week, Powell sang the praises of Fed independence: “Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors.”

Thursday’s data, however, supports the theory that rate hikes will occur at a slower pace than in the past. After four consecutive increases of 0.75 percentage points, the Federal Reserve considered in December that it was time to slow down and see how the effects of tightening of monetary policy would unfold, and it decided to approve a 0.5-point increase, up to the range of 4.25%-4.5%.

“We think this week’s reading of core Consumer Price Index (CPI) inflation will solidify another step down in the Fed’s pace of tightening. After hiking 50 basis points at the December meeting, we expect the Fed moves to a 25 basis point hiking pace in early February, and ultimately pause around 5%,” said the economists Tiffany Wilding and Allison Boxer, from the investment management firm PIMCO.

With unemployment at 3.5%, the lowest rate in half a century, the central bank is still trying to navigate the narrow path that would allow it to avoid a full-blown recession and achieve the desired soft landing of the economy. Most economists see a recession as likely, but they also expect it to be mild and do not rule out that the US will manage to avoid it, given the strength of the labor market. Faced with labor shortages and difficulties in hiring, companies are thinking twice before laying off employees, as they did in other situations when demand began to fall, feeding back into the recessionary dynamics.

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