US inflation falls to slowest pace in more than a year

US annual inflation fell to its lowest pace in more than a year in December, another sign that price pressures have peaked amid the Federal Reserve’s historic tightening campaign.

The consumer price index, released by the Bureau of Labor Statistics on Wednesday, fell for the sixth straight month and posted a 6.5 percent annual increase.

While still near a decade-high, it marks the slowest pace since October 2021 and represents a notable drop from the 9.1 percent threshold reached in June. Month-on-month, prices are down 0.1 percent after.

The closely-tracked “core” metric, which excludes volatile food and energy prices and is considered the best indicator of inflation trajectories, rose 0.3 percent month-on-month, at an annual pace of 5.7 percent.

Fed officials are closely monitoring the latest inflation data as they decide how much to squeeze the US economy. Having already backtracked to a half-point rate hike last month – after four consecutive hikes of 0.75 percentage points – the central bank is now considering whether to return to a more typical pace of a quarter-point at its next monetary policy meeting.

In December, the Fed chose to slow the pace of rate hikes, having already raised them significantly in a short space of time. It also took into account the time it takes for changes in monetary policy to affect economic activity.

The decision followed a string of better-than-expected inflation data that suggested consumer demand was starting to weaken more significantly. This happened in tandem with a loosening of supply chain nodes that helped push down prices on energy and everyday items like cars, appliances and clothing.

The Fed pays close attention to services inflation, once energy, food and housing costs are deducted, which officials say are closely linked to the labor market and wage increases that have emerged as employers have tried to fill acute labor shortages. Wage growth has slowed from its peak, but there are still strong job gains and the unemployment rate is still hovering around historic lows.

The concern is that service-related price pressures will be difficult to eradicate and will require a period of very low growth and higher unemployment. Officials have sent a unified message since their December meeting that the fed funds rate must likely exceed 5 percent and be maintained at that level throughout 2023 to bring inflation under control. It is currently between 4.25 percent and 4.5 percent.

This contradicts current market prices, which suggest the Fed will raise interest rates to just under 5 percent and cut them by the end of the year.

https://www.ft.com/content/db2a72b2-879b-4dbc-a215-6acd6851ebf0 US inflation falls to slowest pace in more than a year

Adam Bradshaw

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