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    Home » News » CPI report shows inflation rate slowed to 6.5 percent in December
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    CPI report shows inflation rate slowed to 6.5 percent in December

    James MartinBy James MartinJanuary 12, 2023No Comments7 Mins Read
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    Inflation eased again in December, giving relief to households and businesses nationwide and offering more assurance to economic policymakers that steep price increases are pulling back without triggering massive consequences for the broader economy — so far.

    The latest inflation data, released Thursday by the Bureau of Labor Statistics, showed prices were 6.5 percent higher in December than they were a year before — and fell 0.1 percent compared with November, the first time prices have dropped month-over-month since May 2020. The annual rate of price increases was the slowest since October 2021. Inflation is still well above normal levels, and the economy remains vulnerable to shocks that could send prices back up. But officials and American families alike have been desperate for signs that the Federal Reserve’s fight against inflation is working and that the economy, especially the labor market, will continue to stabilize in 2023.

    “What we saw in the inflation data is that what [the Fed] is doing is working,” said Betsey Stevenson, an economist at the University of Michigan and a former member of the Council of Economic Advisers in the Obama administration. “And so far, it hasn’t slowed the economy so much that we’ve seen net losses in jobs.”

    Stocks were up slightly by midday Thursday. The Dow Jones industrial average rose 245 points, or 0.7 percent. The S&P 500 and the Nasdaq were up 0.4 percent.

    The December report, known as the consumer price index, follows encouraging news from October and November, when prices fell more than expected, helping to alleviate worries of a one-off drop. Falling costs for gasoline significantly helped to pull prices down in December, more than offsetting a continued rise in shelter costs. In remarks Thursday, President Biden said falling gas prices were a major reason American families had some “real breathing room.”

    Prices for used cars and trucks fell 2.5 percent in December, the sixth consecutive month of declines. Airfares fell 3.1 percent, slightly better than in November. The rate of food cost increases improved to 0.3 percent in December, down from 0.5 percent in November. Egg costs, however, jumped 11.1 percent as the industry deals with a severe outbreak of avian flu.

    Housing costs continue to go up, rising 7.5 percent over the past year and accounting for more than half of the total increase in a measure known as “core inflation,” which strips out more-volatile categories such as food and energy. Specifically, rents climbed 0.8 percent in December, as they had in November.

    Other notable increases included household furnishings and operations (up 6.7 percent), medical care (up 4 percent) and new vehicles (up 5.9 percent).

    Economists have many ways to look under the hood of the inflation report to tease out whether supply chains are improving or if worker shortages are putting pressure on prices. Wendy Edelberg, the director of the Hamilton Project and a senior fellow in economic studies at the Brookings Institution, a center-left D.C.-based think tank, said she has been particularly focused on goods prices, which soared earlier in the pandemic as people shifted their spending from services to things. That could mean eating out less at restaurants, and instead getting new kitchen equipment.

    “If we didn’t see deflation in this category, it’d give me a lot less hope that we were really going to get inflation under control without a whole lot of pain,” Edelberg said. “And indeed, three months of outright declines — that is spectacular news.”

    If a trend toward lower price increases is in the making, there’s a long way to go. Rent costs weigh heavily on overall inflation and aren’t expected to come down meaningfully until later this year, despite a major slowdown in the housing market. To spot areas where inflation may pose a longer-term problem, Fed officials have directed their attention to a narrow measure of inflation that focuses on services outside of the food, energy and housing markets. The services of concern, in which price growth can be especially sticky and put more pressure on wages, include health care, education and hospitality.

    “It is the core services inflation, excluding shelter services, that just has shown no sense that it’s coming down,” San Francisco Fed President Mary Daly said this week at an event with the Wall Street Journal. “And that historically [has] been persistent, and very highly related to the progression of the labor market and wage growth.”

    How the Fed’s rate hikes slow the economy — and affect you

    Fed officials have long said their decisions will be guided by incoming data, and the December report is not expected to overhaul their outlook. But it will help fill in their expectations for where inflation is headed before their next meeting, set for Jan. 31 and Feb. 1. They’re expected to raise the benchmark interest rate by either half a percentage point or one-quarter of a percentage point as they move closer to pausing hikes altogether.

    “The Fed is likely preparing to pause [rate hikes] sometime before the middle of the year, and that’s about as good as you’re going be able to get,” Joe Brusuelas, the chief economist at RSM, said of the inflation report. “But just remember: Go into a grocery store today and look at the price of eggs. And remind yourself: Don’t get overexcited about inflation” coming down quickly.

    After Thursday’s report, Philadelphia Fed President Patrick Harker said that he expected a few more rate increases this year and that “hikes of 25 basis points will be appropriate going forward.” Boston Fed President Susan Collins told the New York Times on Wednesday, before the data release, that she was leaning toward a quarter-point interest rate increase.

    For nearly all of 2022, the Fed scrambled to catch up to sky-high prices, hoisting rates by more than four percentage points over the course of the year, the fastest pace in decades. Central bankers haven’t finished yet, and they’ve signaled two or three more increases in the coming months. But they will soon shift into a new chapter, pausing rates and keeping pressure on the economy simply by holding borrowing costs high rather than pushing them up more.

    The obvious risk is that the Fed might slow the economy so much that a recession starts. If history is any guide, that could happen this year as the full effect of high rates takes hold. But, so far, many parts of the economy remain surprisingly resilient: Employers are still eager to hire, and the employment market added a strong 223,000 jobs in December. Consumer spending stayed strong through the holiday season. And although layoffs have hit certain parts of the economy, including the housing and tech industries, they are far from widespread.

    “We’ve seen some corrections in the labor market,” said Stevenson, of the University of Michigan. “But the industries that are still recovering from the pandemic have not felt the need to stop adding workers. That growth is making up for some of the industries that are pulling back. And that’s exactly the right balance we want to have.”

    See just how bad a year it was for your retirement account — and why

    Still, uncertainty about the economy’s future can be enough to spook people into pulling back. At First Class Tattoo in New York City, owner Mikhail Andersson said he’s had more cancellations over the past few months than ever before. People will call in the middle of multiday sessions and say they have to wait and save up money before coming back.

    Meanwhile, the cost of every single thing Andersson needs to run his shop has gone up, including gloves, paper towels and medical supplies. Yet, he hasn’t raised prices, because “if we raise the price, we lose the clients.” Andersson has seen a pickup in business since the year began, possibly driven by customers who got gift cards or cash over the holidays. He hopes the trend sticks.

    “Our business itself — it’s not like groceries. So when the economy gets hit, it’s not necessary,” Andersson said. “If people don’t have extra money, they’re not going to get a tattoo. They’re going to feed their family.”



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