food and energy
Inflation continued to slow year-on-year in December, providing welcome relief for American households and a positive development for policymakers at the Federal Reserve and the White House.
The consumer price index rose 6.5 percent in the year to last month, down from 7.1 percent in November, as prices eased slightly on a monthly basis. The annual rate of inflation was the slowest since October 2021, a setback that came as gas prices fell and plane ticket prices fell.
Economists and Fed officials are more focused on the so-called core inflation measure, which strips out food and fuel prices, to get a sense of underlying price trends. That measure rose 5.7 percent in December from a year earlier, compared with 6.0 percent previously and in line with forecast expectations.
The bottom line is that inflation is starting to slow significantly, helped by developments, including cheaper ones prices at the gas pump and cheaper plane tickets. But the key question now is how quickly and how fully it will return to normal after a year and a half of unusually rapid increases, and policymakers are wary that a full slowdown could be a long process.
Several factors should help slow price growth this year. Pulling back in commodity price inflation is expected to help cool headline inflation this year as supply chains recover. Rising rental costs may continue to push inflation higher for some time, which is expected to reverse by mid-2023. Rents for newly rented apartments have started to rise much more slowly, private data show. which will feed into the official government measure of inflation over time.
But Fed officials are watching closely what happens to the prices of other services, which include things like hotel rooms, tickets to sporting events and health care. They worry that services inflation – which is unusually fast – could keep prices rising faster than the central bank’s target. The Federal Reserve aims for an average of 2 percent inflation, setting that goal using a price measure that is different from, but related to, the consumer price index.
Many central bankers believe that they will get services inflation under control, they should slow the labor market and reduce wage gains. Otherwise, companies facing higher labor bills will likely continue to pass those costs on to consumers.
“The biggest expense so far in this sector is labor,” Fed Chairman Jerome H. Powell said recently. press conference in December. “And we’re really seeing a very, very strong labor market, one where we haven’t seen a lot of softening, where job growth is very high, where wages are very high.”
To cool conditions, central bankers are raising interest rates, making borrowing more expensive for companies and households in an effort to slow demand and the economy as a whole.
Fed policymakers have a delayed increase in interest rates after a series of rapid moves in 2022, and officials suggested they could delay them further with their Feb. 1 interest rate decision. But officials expect to raise rates at least a little more and then keep them high until they see strong evidence that price increases are slowing, even if it does some economic damage.
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