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Decrease in U.S consumer prices offers hope for Inflation Trend, but Labor Market Remains Tight

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  • Staff Report 

The Consumer Price Index (CPI) in the United States fell for the first time in over 2-1/2 years in December. The decrease was driven by declining prices for gasoline and motor vehicles, which may indicate that inflation is on a sustained downward trend. However, the labor market remains tight.

Food prices also saw a small increase last month, but rents and utilities remain high, according to Reuters. This decrease in inflation may allow the Federal Reserve to reduce the pace of interest rate increases next month. The Fed has been raising interest rates at a fast pace since the 1980s.

Gasoline prices dropped 9.4% after falling 2.0% in November, while natural gas prices increased 3.0% and electricity prices increased 1.0%. Food prices increased 0.3%, the smallest gain in nearly two years, with fruit and vegetable prices falling and dairy product prices also declining. Meat, poultry, and fish prices increased, and egg prices surged 11.1% due to avian flu.

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The CPI increased 6.5% in the 12 months through December, the smallest increase since October 2021. Inflation remains well above the Federal Reserve’s 2% target. President Joe Biden welcomed the disinflationary trend, saying it was “giving families some real breathing room,” and “proof that my plan is working.”

The Fed raised its policy rate by 425 basis points from near zero to a 4.25%-4.50% range, the highest since late 2007. In December, it projected at least an additional 75 basis points of hikes in borrowing costs by the end of 2023.

Excluding the volatile food and energy components, the CPI climbed 0.3% last month after rising 0.2% in November. In the 12 months through December, the so-called core CPI increased 5.7%. That was the smallest gain since December 2021 and followed a 6.0% advance in November.

Prices for used cars and trucks fell 2.5%, recording their sixth straight monthly decline. New motor vehicles slipped 0.1%, falling for the first time since January 2021. Core goods prices slipped 0.3%, declining for a third straight month. Apparel prices rose despite retailers offering discounts to clear excess inventory. While goods deflation is becoming entrenched, services, the largest component of the CPI basket, accelerated 0.6% after gaining 0.3% in November.

The decrease in consumer prices may provide relief for American families, but the economy’s trajectory is uncertain. It’s possible that a softer landing, stronger jobs market and less aggressive stance from the Fed could occur, but only time will tell.

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