Inflation eased substantially for a third month in December as tumbling gasoline prices and a moderating rise in grocery bills offset another surge in rent.
Consumer prices increased 6.5% from a year earlier, down from 7.1% in November and a 40-year high of 9.1% in June, according to the Labor Department’s consumer price index, a measurement of what people pay for goods and services, which labor released on Thursday.
The rise last month marks the slowest annual gain since October 2021 and matches economists’ estimates.
Consumer price index month over month
On a monthly basis, consumer prices fell 0.1%, the first decline since May 2020.
What does core the index mean?
Core prices, which exclude volatile food and energy items and better reflect longer-term trends, increased 0.3% from November following a 0.2% bump the previous month. That lowered the annual increase from 6% to 5.7% – the smallest advance in a year.
“This month’s report provides confirmation that the downshift in inflation pressures is becoming entrenched,” Morgan Stanley wrote in a note to clients.
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Historic inflation rates
Americans have been struggling with a historic inflation spike since spring 2021 as an easing pandemic stoked consumer demand even while supply chain bottlenecks spawned product shortages. The surge led the Federal Reserve to aggressively raise interest rates to beat back inflation in a campaign that threatens to topple the nation into recession this year.
But the price increases have been easing in recent months.
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Where is inflation slowing down
Generally, prices for goods such as used cars and furniture have been falling or stabilizing as COVID-19-induced supply chain troubles have improved and demand has ebbed. But the cost of services has marched higher as more Americans return to traveling and other activities even as lingering worker shortages push up wages.
Fed Chair Jerome Powell says the Fed won’t feel confident that inflation is sustainably slowing – allowing it to pause its interest rate hikes – until pay increases in service industries throttle back.
Still, the central bank is moving more cautiously. Markets expect the Fed to dial back to a quarter-point rate increase early next month after a half-point hike in December.
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Inflation has now eased since July but the pullback has accelerated over the past three months. And price increases are projected to continue to slow dramatically in 2023. Barclays expects annual inflation to reach 2.6% by the end of the year, modestly above the Fed’s 2% target.
S&P 500
Major stock indexes edged higher on Thursday following the inflation report. The S&P 500, the broadest market gauge, rose 5 points, or less than 1%. The Dow Jones Industrial Average rose 301 points, a similar percentage gain. Stocks have been moving higher this week off expectations that the consumer price index would continue to build off November’s decline.
Why are gas prices falling so fast?
In December, gas prices declined for the fifth time in six months amid growing worries about a global recession and lower oil demand. Pump prices slid 9.4%. Nationally, regular unleaded gasoline averaged $3.27 a gallon Wednesday, down from about $5 in June, according to AAA.
“That is helping,” Cheryl Stewart, of Perry Hall, Maryland, said of the recent decline. “It definitely frees up the money for something else.”
Stewart says the savings have allowed her to resume her morning ritual of stopping for a coffee at Dunkin Donuts or Starbucks on her way to work.
But she says grocery prices are still too high. “I’m in major shock when I see the price of a dozen eggs at more than $4,” Stewart says.
So she has stopped buying eggs and chicken wings. Wing prices also have soared.
To better cope with high food costs, Stewart, a public relations manager at a university, took on part-time freelance work 15 hours a week, allowing her and her family to travel more.
Egg prices
Grocery prices are still ratcheting higher but more slowly, rising by 0.2% from November and 11.8% over the past year. The cost of commodities such as wheat and corn have fallen in recent months because of easing global demand.
In December, the price of eggs leaped 11.1% and is up nearly 60% from a year ago as bird flu continues to thin chicken supplies. Breakfast cereal prices rose 1.1% and 13% from a year ago. Rice was up 0.5% and 15.4% annually. And bread edged up 0.2% and was 15.9% pricier than a year earlier.
But some food costs that had been soaring retreated. Bacon slipped 2.9%; chicken, 0.6%; fresh fish and seafood, 1%; and uncooked ground beef, 0.1%, the latest in a string of declines.
Some other costs kept climbing. Rent jumped 0.8% monthly and 8.3% over the past year. Economists expect rents to fall, based on new leases, but not until later this year. Car repair prices rose 1% and 13% annually. And the price of a haircut increased by 0.3% and 6.3% from a year ago.
Clothing prices, which had been dropping or stabilizing as supply problems eased, rose 0.5%. Furniture costs were flat.
Meanwhile, used car prices fell 2.5%, the sixth straight monthly decline and are now down 8.8% annually after increasing sharply earlier in the pandemic. Airfares declined by 3.1%.
Initial jobless claims
In other positive economic news, applications for unemployment benefits fell to their lowest level in 15 weeks as the job market continues to show resiliency in the face of attempts by the Fed to cool the economy.
The number of Americans applying for jobless aid for the week ending Jan. 7 fell by 1,000 to 205,000, the Labor Department said Thursday.
Jobless claims are generally viewed as a proxy for layoffs, which have been relatively low since the pandemic wiped out millions of jobs in the spring of 2020.
The labor market is closely monitored by Fed policymakers, who raised interest rates seven times last year in a bid to slow job growth and bring down stubbornly high inflation.
Contributing: The Associated Press
