By Andrew Moran
The U.S. annual inflation rate slowed to 6.5 percent in December, down from 7.1 percent in November, according to the Bureau of Labor Statistics (BLS). The consumer price index dipped 0.1 percent month-over-month.
The core inflation rate, which strips the volatile food and energy sectors, eased to 5.7 percent last month, down from 6 percent in the previous month.
Food prices remained elevated as the index was 10.4 percent higher than the same time a year ago. Supermarket prices remained relatively unchanged at 11.8 percent.
Gasoline prices continued their downward trend, plunging 9.4 percent from November to December. On an annualized basis, gas prices are down 1.5 percent. While fuel oil is up 41.5 percent year-over-year, it has plummeted 16.6 percent month-over-month.
New vehicles slowed further to 5.9 percent and dropped 0.1 percent on a monthly basis. Used cars and trucks tumbled 8.8 percent year-over-year and fell 2.5 percent month-over-month.
Apparel prices advanced 2.9 percent, shelter costs soared 7.5 percent, and transportation services jumped 14.6 percent. Medical care commodities and services advanced 3.2 and 4.1 percent, respectively, year-over-year.
Within the food index, eggs recorded a considerable increase as prices surged 60 percent year-over-year in December. From November to December, egg costs climbed 11.1 percent. Other food items witnessed considerable gains from a year ago: margarine (43.8 percent), butter (31.4 percent), lettuce (24.9 percent), flour (23.4 percent), coffee (14.3 percent), and milk (12.5 percent).
What will not be good news for parents is that food at elementary and secondary schools spiked 305 percent from a year ago.
Rents gained 7.6 percent from last year and rent of primary residence surged 8.3 percent, adding to broader shelter costs. Utilities also edged up higher, with electricity prices rising 14.3 percent and utility piped gas service climbing more than 19 percent.
Reaction to the December CPI report was subdued. The Dow Jones Industrial Average rose about 100 points, the S&P 500 added 0.4 percent, and the Nasdaq Composite Index was flat.
Metal commodities soared after the report, with gold prices topping $1,900 an ounce and silver soaring nearly 3 percent to above $24 per ounce.
The benchmark 10-year Treasury yield shed 5 basis points to around 3.50 percent.
What’s Next for Inflation?
Looking ahead to the January CPI, the Federal Reserve Bank of Cleveland expects the annual inflation rate to come in at 6.5 percent and the month-over-month reading to rise 0.5 percent.
Greg McBride, the chief financial analyst at Bankrate, explains that the inflation print “will command a lot of attention and go a long way toward further shaping expectations for the first Federal Reserve meeting of 2023.”
“Continued moderation in price pressures across a broader range of goods and services will underscore the notion that inflation has peaked and sustain the hope for further relief from inflation in the months ahead,” he said in a note.
The Federal Open Market Committee (FOMC) will hold its next two-day policy meeting on Jan. 31 and Feb. 1, with many investors anticipating a rate hike of just 25 basis points, according to the CME FedWatch Tool.
Moderating labor data and slowing inflation could nudge the Fed to hit the pause button on its tightening cycle by the spring, leaving the federal funds rate (FFR) at about 5 percent, market observers say.
“This inflation data release is not enough to hinder a hawkish Fed,” says Giuseppe Sette, Toggle AI President and Co-Founder. “Inflation is abating (as its leading indicators have been suggesting) but the Fed might consider that the level of inflation is still far too high, and the risk of sticky inflation too elevated, to stop the hiking cycle in its tracks. Until the labur market remains strong as it is – outside of tech and finance – the Fed might stay the course and keep hiking.”
The central bank’s Survey of Economic Projections (SEP) has penciled in a median rate of 5.1 percent in 2023. Fed Chair Jerome Powell told reporters during last month’s post-FOMC meeting news conference that the institution is nearing closer to a restrictive level, which is monetary policy that slows economic growth.
Many Fed officials have presented the case that the central bank needs to lift rates higher, pause, and then leave them there to see how its actions are affecting inflation and the broader economy.
Minneapolis Fed Bank Neel Kashkari recently wrote in an essay posted to the regional central bank’s website that he sees the FFR peaking at 5.4 percent.
“While I believe it is too soon to definitively declare that inflation has peaked, we are seeing increasing evidence that it may have. In my view, however, it will be appropriate to continue to raise rates at least at the next few meetings until we are confident inflation has peaked,” he wrote.
“Once we reach that point, then the second step of our inflation fighting process, as I see it, will be pausing to let the tightening we have already done work its way through the economy.”
His colleagues have a slightly lower number in mind.
Speaking in a Wall Street Journal interview on Monday, San Francisco Fed Bank President Mary Daly thinks the benchmark rate needs to rise to a range of 5 and 5.25 percent to successfully grapple with inflation.
Atlanta Fed Bank President Raphael Bostic also told the Atlanta Rotary Club on Monday that rates should rise to the 5 and 5.25 percent range and hold them there for “a long time.”
“I am not a pivot guy. I think we should pause and hold there, and let the policy work,” he said.