Inflation in the U.S. Falls to Lowest Level in Over a Year

The annual inflation rate in the U.S. fell in December to its lowest level in over a year, providing further evidence that price pressures have peaked amid the historic tightening of monetary policy by the Federal Reserve, reports the Financial Times.

The Consumer Price Index, just released by the U.S. Bureau of Labor Statistics, has fallen for the sixth consecutive month, recording an annual increase of 6.5 percent. Although it remains close to the highest level in the last decade, this is the slowest growth rate since October 2021 and represents a significant decline from the threshold of 9.1 percent reached in June. Compared to the previous month, prices fell by 0.1 percent.

The closely watched ‘core’ inflation, which excludes volatile food and energy prices and is considered the best indicator of the inflation trajectory, rose by 0.3 percent compared to the previous month, indicating an annual rate of 5.7 percent.

Interest Rates Depend on Inflation

Fed officials are closely monitoring the latest inflation data as they decide how much more to ‘press’ the U.S. economy. After raising interest rates by half a point last month (following four consecutive increases of 0.75 percentage points), the U.S. central bank, the Fed, is now considering whether it can return to a more typical pace of a quarter point at the next meeting.

In December, the Fed decided to slow the pace of interest rate increases, having already raised them significantly in a short period. The time required for changes in monetary policy to affect economic activity was also taken into account.

The decision followed a series of better-than-expected inflation data, suggesting that consumer demand is beginning to noticeably decline. This occurred alongside easing supply chain bottlenecks, which helped lower energy prices and everyday items such as cars, appliances, and clothing.

Service Inflation is Concerning

The Fed is paying close attention to service inflation, after excluding costs for energy, food, and housing, which officials say are closely tied to the labor market and wage gains that have accumulated as employers have sought to overcome a significant labor shortage.

Wage growth in the U.S. has slowed from its peak, but there is still strong job growth, and the unemployment rate remains around historically low levels.

At the Fed, there are concerns that rising service prices will be difficult to eradicate and will require a period of very low economic growth and higher unemployment.

Officials have sent a unified message since their gathering in December that the federal funds rate will likely need to exceed 5 percent and remain at that level throughout 2023 to bring inflation under control. It currently ranges between 4.25 percent and 4.5 percent.

This contrasts with current market prices, which suggest that the Fed will raise its benchmark rate slightly below 5 percent and will reduce it by the end of the year.