Inflation eased sharply for a third month in December as lower petrol prices and a moderate rise in grocery bills offset another rise in rents.
Consumer prices rose 6.5% from a year earlier, down from 7.1% in November and a 40-year high of 9.1% in June, according to the Labor Department’s Consumer Price Index, a measure of what people pay for goods, services, and labor. Released on Thursday.
Last month’s rise marked the slowest annual gain since October 2021 and matched economists’ estimates.
CPI month by month
On a monthly basis, consumer prices fell 0.1%, the first decline since May 2020.
What does basic CPI mean?
Core prices, which exclude volatile food and energy and better reflect long-term trends, rose 0.3% from November after rising 0.2% in the previous month. This reduced the annual increase from 6% to 5.7%.
“This month’s report provides confirmation that the decline in inflation pressures is becoming entrenched,” Morgan Stanley wrote in a note to clients.
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Historical inflation rates
Americans have suffered a historic spike in inflation since the spring of 2021 as the outbreak of the pandemic fueled consumer demand even as supply chain bottlenecks caused product shortages. The rally prompted the Federal Reserve to aggressively raise interest rates to beat inflation in a campaign that threatens to tip the nation into recession this year.
But the price increases have started to ease in recent months.
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Where is inflation slowing?
In general, prices of commodities such as used cars and furniture have been declining or stabilizing as supply chain issues caused by the novel coronavirus have improved and demand has declined. But the cost of services has risen as more Americans return to travel and other activities even as worker shortages continue to drive up wages.
Fed Chairman Jerome Powell says the Fed will not feel confident that inflation is sustainably slowing – allowing it to pause interest rate increases – until wage increases in service industries ease up again.
However, the central bank is moving more cautiously. Markets expect the Fed to return to a quarter-point rate hike early next month after a half-point hike in December.
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Inflation has now declined since July but the decline has accelerated over the past three months. Price increases are expected to continue to slow significantly in 2023. Barclays expects annual inflation to reach 2.6% by the end of the year, slightly above the Fed’s target of 2%.
Standard & Poor’s 500
Major stock indexes rose on Thursday after the inflation report. The S&P 500, the broadest measure of the market, rose 5 points, or less than 1%. The Dow Jones Industrial Average rose by 136 points, which is a similar percentage increase. Stocks have been moving higher this week off expectations that the CPI will continue to build on November’s decline.
Why are gas prices dropping so quickly?
In December, gas prices fell for the fifth time in six months amid growing concerns about a global recession and falling demand for oil. Pumping prices decreased by 9.4%. Nationwide, the price of regular, unleaded gasoline averaged $3.27 a gallon Wednesday, down from about $5 in June, according to AAA.
“It helps,” Cheryl Stewart, of Perry Hall, Maryland, said of the recent retreat. “It definitely saves money for something else.”
Stewart says the savings have allowed her to resume her morning ritual of stopping for coffee at Dunkin Donuts or Starbucks on the way to work.
But she says grocery prices are still too high. “I’m pretty shocked when I see a dozen eggs cost over $4,” Stewart says.
So I stopped buying eggs and chicken wings which also went up in price.
To better deal with rising food costs, Stewart, a public relations director at a university, took up part-time work 15 hours a week, which allowed her and her family to travel more.
Why do food prices rise?
Grocery prices are still moving higher but more slowly, rising 0.2% from November and 11.8% over the past year. The cost of commodities such as wheat and corn has fallen in recent months as global demand has slumped.
In December, the price of eggs jumped 11.1% and was up nearly 60% from a year ago as bird flu continued to reduce chicken supplies. Breakfast cereal prices increased 1.1% and 13% from last year. Rice rose 0.5% and 15.4% annually. The price of bread increased by 0.2% and was 15.9% higher than the previous year.
But some once very high food costs have come down. bacon fell 2.9%; chicken 0.6%; fresh fish and seafood, 1%; and uncooked ground beef, 0.1%, the latest in a series of declines.
Some other costs continued to rise. Rent jumped 0.8% per month and 8.3% over the past year. Economists expect rents to fall, based on new leases, but not until later this year. Auto repair prices increased by 1% and 13% annually. And the price of a haircut increased by 0.3% and 6.3% from last year.
Apparel prices, which had been declining or flat as supply problems eased, rose 0.5%. Furniture costs were fixed.
Meanwhile, used car prices fell 2.5%, the sixth consecutive monthly decline, and are now down 8.8% annually after rising sharply earlier in the pandemic. Aircraft prices fell 3.1%.