The drop was in line with estimates but may not be enough to convince the Federal Reserve to stop raising interest rates.
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Consumer prices fell in December, continuing the recent slowing of inflation from the heights reached last summer, the Bureau of Labor Statistics reported on Thursday.
The consumer price index fell 0.1% from November, hitting an annual level of 6.5%. That was the smallest annual rate of increase since October 2021. The core index, leaving out food and energy, rose 0.3% for the month, bringing the yearly rate to 5.7%.
The numbers were in line with expectations and driven largely by a 4.5% decrease in the price of gasoline.
The Federal Reserve has been raising interest rates at a record pace to bring inflation down closer to its 2% annual goal. After a string of 75 basis point hikes, the central bank moderated the pace in December with a 50 basis point increase and analysts believe it will step down further to 25 basis points in February.
Already, the higher rates are having an effect, with home sales off nearly 40% from last year as mortgage rates hit 6% or so. Businesses have reported a slowdown in orders but also weaker prices for the goods and services they buy.
The labor market, though, remains strong with 223,000 new jobs created in December, above expectations, and the unemployment rate at 3.5%. Despite some large layoffs at headline companies like Amazon, Goldman Sachs and Meta, the overall hiring environment remains strong.
“We’re seeing very normal patterns,” says Will Stonehouse, founder and president of Crawford Thomas Recruiting in Orlando. “We’re remaining very busy.”
Stonehouse says that there are still not enough skilled applicants to fill jobs, especially in technology and other high-end positions. “The special skills gap, from accounting to IT, that shortfall in skill sets is keeping demand high.”
While there has been improvement in inflation, notably for goods such as used cars, furniture and other long-lived purchases, prices have trended upward in the services sector. Wages, meanwhile, have moderated somewhat.
Unemployment claims have remained in a range around 200,000. The number of Americans filing first-time claims for unemployment benefits last week was 205,000, down 1,000 from the previous week.
The four-week moving average was 212,500, down 1,750 from the prior period.
“The pace of core inflation has slowed significantly from averaging 0.5% [month over month] in Q3 2022, mostly an outcome of long-awaited goods deflation,” Vanguard Senior Economist Andrew Patterson wrote on Wednesday. “However, is it early to celebrate falling inflation? While we expect this deflation to continue as we head into 2023, the factors driving inflation have now switched to services inflation which could keep core around 3% by [year end] 2023.”
Investors and others are hopeful the slowing down of inflation will lead the Fed to back off its aggressive monetary tightening and that has been reflected in yields on 30-year Treasuries falling in recent weeks. However, recent comments by Fed officials have been hawkish in nature, promising that rates will remain higher for longer than the market expects.
A recession in 2023 is still factored into estimates, says Gene Goldman, chief investment officer at Cetera Financial Group. But, he adds, “we do expect it to be mild.”
Goldman says the economy could experience rolling recessions whereby activity and hiring contracts in some sectors like housing but not in others and the labor market remains strong by historical standards.
“We do think CPI will continue to move lower,” Goldman says.
But that may not be enough yet for the Fed, especially since it will be a while before some of the reduction in prices, such as falling rents, shows up in the government data..
“Overall, a pick-up in the pace of goods deflation is a welcome sign for the Fed in its goal to achieve a soft landing,” Vanguard’s Patterson added. “However, we would still need two more ingredients for this to be a success, a slowing labor market and persistently cooling shelter inflation.“
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