Inflation drops to 6.5% in December as price pressures ease
Zachary Halaschak
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Annual inflation slowed to 6.5% in December, the Bureau of Labor Statistics reported Thursday, a sign that the price pressures that have wracked the economy over the past year are easing.
The much-anticipated numbers from the consumer price index show that, while inflation is far too high, it is continuing to cool in response to the Federal Reserve’s aggressive interest rate hikes. Inflation had been running at 7.1% the month before. Tuesday’s report marks six straight months of declines in annual inflation after the rate peaked at a whopping 9.1% in June.
Meanwhile, “core inflation,” which strips out volatile food and energy prices, fell three-tenths of a percentage point to 5.7% in the year ending in December.
Prices overall fell a tenth of a percentage point between November and December (as opposed to an annual basis), according to the index.
“As with the labor market report, a mixed bag when you dig into the nuance. Headline prices fell on the month and [annual core inflation] came down. Food prices rose a bit more than anticipated, as did apparel,” said Andrew Patterson, a senior economist at Vanguard.
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The higher prices are hitting consumers hard. The rising cost of food, in particular, has been difficult for many households. The price of chicken has risen 10.9% over the last year, while dairy products have increased by more than 15%.
Meanwhile, energy prices have risen by about 7.3% just in the past year, and people in many places, especially in cold New England, are facing the prospect of major bills for heating their homes this winter.
The main tool the central bank has to control inflation is increases in its interest rate target, which it has jacked up over the past year to dampen demand in hopes of driving down inflation.
After four consecutive meetings of historic 0.75-percentage-point rate hikes, the Fed down throttled a bit during its December meeting and opted for a 0.5-point hike (which is double the typical amount by which rates are incrementally increased).
A natural effect of raising rates is that the econo my and, ultimately, the labor market slows. Despite the massive increase in interest rates, the economy has proven remarkably resilient.
The economy added 223,000 more jobs in December, the Bureau of Labor Statistics reported last week, a strong performance that shows commerce is holding up despite the headwinds. The unemployment rate fell to 3.5%, tied for the lowest rate since the late 1960s.
Fed officials have said the labor market needs to take a bit of a hit in order for inflation to be restrained, and Fed Chairman Jerome Powell has said that job openings “need” to come down.
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The situation is a double-edged sword in that if the labor market doesn’t cool off and inflation remains stubborn, the Fed might have to continue jacking up rates to a higher-than-expected degree, which has the potential to knock the economy into a recession.
Economists are watching every economic report, both on inflation and the employment situation, closely in order to assess whether the Fed’s series of rate hikes is finally beginning to work.