Nationwide inflation eased down from 7.1% in November to 6.5% in December, marking the sixth monthly decline in inflation’s headline reading since June’s four-decade high of 9.1%.
The Consumer Price Index (CPI) — a measurement of what consumers pay for goods and services — fell 0.1% in December and rose 6.5% over the last 12 months, the smallest annual increase since October 2021, the U.S. Bureau of Labor Statistics reported Tuesday.
Core Inflation, which excludes the volatile nature of food and energy from the measurement, rose 0.3% in December after rising 0.2% in November. On an annual basis, Core CPI came in at 5.7% in December, which is down from October’s 6.3% and November’s 6% respective readings.
The 9.4% drop in the gasoline index was by far the largest contributor to the monthly decline in inflation, offsetting the 0.8% increase in the shelter index, the Labor Department said. The index that tracks gasoline has fallen 1.2% on an annual basis, while the shelter index has risen 7.5% over the same 12-month period.
While noting that the trend is promising, Simona Mocuta, chief economist at State Street Global Advisors, warned against being overly optimistic.
“We know that we won’t get the same kind of support from gasoline prices. So don’t expect the next report to look as good as this one,” she said.
Among the indexes that decreased in December were those of energy and new vehicles, which fell 4.5% and 0.1%, respectively.
Indexes that increased over the month included apparel (+0.5%), services (+0.5%), shelter (+0.8%), and transportation (+0.2%). Over a 12-month period, apparel is up 2.9%, services are up 7%, shelter is up 7.5%, and transportation, which fell 0.9% in November, had a YOY increase of 14.5%.
“Inflation is quickly moderating. Obviously, it’s still painfully high, but it’s quickly moving in the right direction,” said Mark Zandi, chief economist at Moody’s Analytics. “I see nothing but good news in the report except for the top-line number: 6.5% is way too high.”
December’s headline and core readings were mostly in line with analysts’ expectations, sending no real shock to the market upon release.
Thursday’s report is not likely to deter the Fed from raising interest rates by 25 percentage points at its first Federal Open Market Committee (FOMC) of 2023, given inflation is still well above the Fed target 2% goal. The next meeting is scheduled for February 1, 2023.
Last year the Federal Reserve embarked on a mission to quell the rapid pace of inflation, increasing the federal funds rate to 4.25%-4.5% over the year and pushing borrowing costs to the highest level since 2007. While interest rates have indeed dampened the pace of inflation, given Thursday’s CPI reading, it hasn’t shown strong enough evidence for the Fed to reverse course.
“In my view, hikes of 25 basis points will be appropriate going forward,” Philadelphia Fed President Patrick Harker said following the release of the CPI report. “I expect that we will raise rates a few more times this year.”
Fed officials have signaled their intention to lift the federal funds rate above 5% in 2023 and keep it there throughout the year.
The Labor Department provides a visualization of the 12-month percentage change in the Consumer Price Index, which can be found here.
January 2023’s Consumer Price Index is scheduled to be released on February 14 at 7:30 a.m. CT.