Now that inflation is cooling, with six straight months of moderating increases, all eyes are on the Federal Reserve’s next meeting, where officials will decide whether to further slow their interest rate hikes.
Consumer prices fell 0.1 percent in December and rose 6.5 percent annually, according to the Labor Department’s consumer price index (CPI) released Thursday. That’s down from the 7.1 percent annual increase in November and the 9.1 percent peak in June. The data bolstered hopes that the U.S. can avoid a recession brought on by the Fed’s interest rate hikes.
The report shows several positive signs for consumers: Energy prices fell 4.5 percent in December, the cost of used cars fell 2.5 percent and food prices saw their smallest month-over-month gain since March 2021.
The data sparked renewed calls for the Fed to slow interest rate hikes, which could cost 1.6 million people their jobs by the end of 2023, according to the Fed’s own projections.
“Today’s CPI report makes it crystal clear that we don’t need mass joblessness to bring down inflation,” Rakeen Mabud, chief economist at the progressive Groundwork Collaborative, said in a statement. “Further interest rate hikes will only weaken our economy and the most vulnerable workers will pay the biggest price.”
At their next meeting, starting Jan. 31, Fed officials are expected to decide whether to raise rates by 25 or 50 basis points. A smaller bump could indicate that the Fed is backing away from its hawkish position.
“The Fed can take solace that its aggressive tightening has succeeded in reducing headline and core inflation,” Eric Merlis, managing director and co-head of global markets at Citizens Financial Group, said in a note. “This number could justify a 25 basis point tightening for the February Fed meeting.”
Still, some analysts warned that Fed officials might not be impressed by Thursday’s report.
Core inflation, which excludes volatile food and energy prices and is closely monitored by the Fed, rose 0.3 percent on a month-to-month basis and 5.7 percent annually. That’s only slightly down from the 5.9 percent reading in July 2022.
Housing costs continue to accelerate, rising 0.8 percent in December, up from 0.6 percent in November. Rents rose 0.8 percent in December and 8.3 percent annually. The Bureau of Labor Statistics noted in a news release that shelter “was the dominant factor in the monthly increase.”
“This lower-than-expected headline CPI inflation print will not make the Fed change its view on the need to keep increasing interest rates in February and March of this year,” Raymond James chief economist Eugenio Aleman wrote in a note, pointing to the core inflation figures.
Seema Shah, chief global strategist at Principal Asset Management, said the data was “a little underwhelming” and added that the real test will come in the second quarter of 2023, when analysts will hope for inflation to fall below 4.5 percent annually.
Some economic indicators remain strong. Friday’s jobs report pegged the U.S. unemployment rate at 3.5 percent, the lowest in 50 years. The tight labor market, where companies still struggle to attract and retain workers, has raised hopes that the U.S. can avoid a recession.
Still, other factors, such as contracting manufacturing data and slowing consumer spending, point to a looming recession. If demand for products and services falls too fast, businesses will have to cut jobs.
Two-thirds of economists polled by The Wall Street Journal recently predicted that the Fed’s interest rate hikes will send the U.S. into a recession.
Federal Reserve Chairman Jerome Powell has repeatedly said that the U.S. will experience painful conditions until inflation is under control. The Fed wants to bring down annual inflation to its 2 percent target rate.
“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,” Powell said Tuesday.
Fed officials raised interest rates seven times last year. Last month, they voted to raise interest rates by 50 basis points, the smallest rate hike since June.
Susan M. Collins, president of the Federal Reserve Bank of Boston, said Wednesday that she was leaning toward supporting a 25 basis point rate hike in February, depending on what the inflation data showed. Collins doesn’t have a formal vote but will weigh in on the decision.
“Adjusting slowly gives more time to assess the incoming data before we make each decision, as we get close to where we’re going to hold. Smaller changes give us more flexibility,” she said in an interview with The New York Times.
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Inflation’s pace eased again. What does that mean for Fed’s interest rates? – The Hill
