Consumer Price Gains Continue to Cool

+5.7% excluding

food and energy



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Inflation continued to slow on an annual basis in December, welcome relief for American households and a positive development for policymakers at the Federal Reserve and the White House.

The Consumer Price Index climbed 6.5 percent in the year through last month, down from 7.1 percent in the November reading, as prices declined slightly on a monthly basis. The annual inflation rate was the slowest since October 2021, a pullback that came as gas prices dropped and airfares declined.

Economists and Fed officials are more acutely focused on a so-called core inflation measure, which removes food and fuel prices to get a sense of underlying price trends. That measure climbed 5.7 percent in December from a year earlier, compared with 6 percent previously and in line with what forecasters had expected.

The takeaway is that inflation is moderating meaningfully. But the key question now is how quickly and how completely it will return to normal after a year and a half of unusually rapid increases, and policymakers are wary that a full deceleration could be a long process.

For the Fed, the inflation report confirms that the slowdown in price gains that officials have been expecting is coming to fruition. Given that, the figures could help policymakers to feel comfortable downshifting the pace of their rate increases. Officials slowed their rate moves in December and have made it clear that they might dial them back further in February — adjusting policy a quarter point (also referred to as 25 basis points) at a time, instead of continuing with the more aggressive adjustments they made throughout 2022.

“I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, said in a speech on Thursday. “In my view, hikes of 25 basis points will be appropriate going forward.”

But the fresh inflation data does little to suggest that the problem of rapid price increases has been fully solved, so central bankers are likely to raise borrowing costs slightly more over the coming months and then leave them elevated for some time to fully wrestle inflation under control.

Several factors should help to slow price increases this year. A pullback in goods price inflation is expected to help cool overall inflation this year as supply chains heal. Climbing rental costs bolstered inflation in December and could continue to push inflation higher for a while, but that is expected to reverse by mid-2023. Rents for newly leased apartments have begun to climb much more slowly, private data suggests, which will feed into the government’s official inflation measure over time.

But Fed officials are closely watching what is happening with prices for other services, which include things like hotel rooms, sporting event tickets and health care. They worry that services inflation — which is unusually rapid — could keep prices increasing faster than the central bank’s target. The Fed aims for 2 percent inflation on average, using a price measure that is different from but related to the Consumer Price Index.

Core services prices excluding housing costs, a measure that both the Fed and economists are watching closely, picked up 0.3 percent in December on a monthly basis. That was up from 0.1 percent in November, according to calculations by Omair Sharif, founder of Inflation Insights.

“What we’ve done is made a pivot from goods inflation,” Mr. Harker said in a question-and-answer session following his speech. “Service inflation ex-shelter is still running really high.”

Many central bankers think that to get services inflation under control, they need to slow down the job market and tamp down wage gains. Otherwise, companies facing larger labor bills are likely to continue passing those costs along to consumers.

“The biggest cost, by far, in that sector is labor,” Jerome H. Powell, the Fed chair, said at his latest news conference in December. “And we do see a very, very strong labor market, one where we haven’t seen much softening, where job growth is very high, where wages are very high.”

To cool conditions, central bankers have been raising interest rates, making borrowing more expensive for companies and households in a bid to slow demand and the broader economy.

Fed policymakers first slowed interest rates increases in December after a series of rapid moves in 2022, and seem potentially poised to slow them down further at their Feb. 1 rate decision. But they still expect to raise rates at least slightly more and then keep them high until they see convincing evidence that price increases are moderating, even if that inflicts some economic damage.


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