There was more good news from the inflation front on Thursday, with consumer prices in December running at the slowest annual pace in 15 months. And compared with the prior month, prices ticked down for the first time since May 2020.
The Labor Department’s Consumer Price Index report confirmed that several factors — mended supply chains, higher interest rates, and government intervention in energy markets — have combined to ease the worst inflation crisis since the early 1980s.
For consumers, milk, gasoline, air travel, and new and used cars and trucks were cheaper last month than in November.
For Federal Reserve leaders — who are on a high-risk mission to rein in inflation without causing a recession — there is now more leeway to further slow the pace of rate hikes when they next meet on Jan. 31-Feb. 1.
And for President Biden and congressional Democrats, there’s an upbeat story to tell, especially now that the president has his own classified documents debacle to deal with.
Before delving deeper, it’s important to step back.
Costs for housing, goods, and services are painfully high and overall are still moving up. For many Americans, wage growth hasn’t kept up. A drop in energy prices — made possible in part by the draining of the US Strategic Petroleum Reserve — has driven much of the recent improvement, and the decline may not continue.
That said, Thursday’s report is another step in the right direction. In the months ahead, consumers may start to feel the change that economists say is underway.
“Pretty darn good news,” University of Michigan economist Justin Wolfers said on Twitter.
The key numbers from the CPI report:
Prices rose 6.5 percent in December over the prior year, down from 7.1 percent in November and the recent peak of 9.1 percent in June.
The so-called core rate, which excludes the volatile food and energy categories, climbed 5.7 percent compared with 6 percent in November and the post-COVID high of 6.5 percent in March.
Looking at December compared with a month earlier, the CPI fell 0.1 percent as lower gas prices offset higher costs for shelter. It was the first decrease since inflation began to surge in the months after COVID hit in 2020.
The results, which matched analysts’ forecasts, sent stocks modestly higher on the day, extending a New Year’s rally. After a horrible 2022, the Standard & Poor’s 500 index has gained 3.7 percent this year, while the tech-heavy Nasdaq is up 5.1 percent.
The yield on the benchmark 10-year Treasury edged lower to 3.46 percent. The yield reached 4.24 percent in late October.
“Today’s inflation numbers are good news — good news about our economy,” Biden told reporters at the White House. “We have more work to do, but we’re on the right track.”
Investors are increasingly optimistic that the Fed is closing in on the end of its campaign to slow the economy by raising the cost of borrowing. The central bank has boosted its benchmark rate to a range of 4.25 to 4.5 percent from near zero last March. Mortgage costs have soared, with the average rate on a 30-year fixed loan at 6.3 percent, nearly double where it was at the start of last year.
The Fed’s most recent rate increase, in December, was one-half percentage point. That followed four straight three-quarter-point hikes, an unusually large increment.
Susan M. Collins, president of the Federal Reserve Bank of Boston, said on Wednesday that a quarter-point interest rate increase, or 25 basis points, at the next meeting might be appropriate.
“I think 25 or 50 would be reasonable; I’d lean at this stage to 25, but it’s very data-dependent,” Collins said in an interview with The New York Times. “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.”
Some economists and investors are urging the Fed to pause now to see whether inflation continues to retreat before boosting rates further and putting millions of workers in danger of losing their jobs. They argue that higher rates take many months to work their way through the economy.
“We still believe the hiking cycle has been too sharp and the Fed is not giving the economy enough time to react,” Nancy Davis, founder of Quadratic Capital Management, said in a note to clients. “We believe that it is about time to pause the hiking cycle and give some time for the economy to respond.”
After Thursday’s CPI news, the conventional wisdom is the Fed will raise rates by a quarter point at least one more time before considering a breather. There is talk that policy makers could actually cut rates later this year, especially if home prices and rents fall as expected. But Fed chairman Jerome Powell has tried hard to disabuse Wall Street of that notion.
After all, the Fed’s preferred inflation measure — the Personal Consumption Expenditures price index excluding food and energy — rose 4.7 percent in November, the latest month available. That’s well above its target of 2 percent.
Moreover, the job market is uncomfortably tight for the Fed. Unemployment is 3.5 percent, where it stood before the pandemic, and wages are rising at a clip that Powell considers inflationary.
The Fed chief has said he and his colleagues are paying close attention to the price of services, excluding energy, where labor costs are the biggest component. That category rose by 7 percent over the past year.
So where does that leave us?
The outlook is brighter than it’s been for a long time. Powell’s dream of a “soft landing” isn’t dead. But the tough slog is far from over.
“We think inflation has peaked and we expect to see a rapid decline in year-over-year [results] for the next couple months,” said Dryden Pence, chief investment officer at Pence Capital Management. “We also, however, note that getting from 9 percent to 5 percent is a much easier task than getting from 5 percent to 2 percent.”
Inflation is cooling off, but the fire isn’t out.
Jim Puzzanghera of the Globe staff contributed to this report.
Larry Edelman can be reached at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd.
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Inflation is retreating — though it doesn’t feel that way - The Boston Globe
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