Inflation Fell 0.1% In December—But Prices Still Spiked 6.5% Over The Past Year

Topline

Inflation in December grew at the slowest pace in more than a year as overall prices fell from one month prior—a welcome sign for the economy as the Federal Reserve decides how aggressively it should raise interest rates in order to tame prices that continue to grow at a historically fast rate.

Key Facts

Consumer prices rose 6.5% on an annual basis, according to data released by the Labor Department on Thursday, falling in line with economist expectations and coming in lower than the 7.1% spike in November.

Prices fell 0.1% on a month-to-month basis, marking the third-straight improvement in monthly inflation and the largest such decline since the height of pandemic uncertainty in April 2020.

Gas prices, which fell 12.5% from November, were “by far” the largest contributor to the overall monthly decrease, more than offsetting an ongoing spike in rent prices (up 0.7%), the government said.

Outside of rent, prices over the past month rose the most for items like food (0.3%) and electricity (1.5%), while prices for used cars and airline fares fell 2.5% and 3.1%, respectively.

Core inflation, which excludes volatile food and energy prices, rose 0.3%—in line with economist projections but more than the 0.2% uptick in November.

Key Background

Amid record consumer spending and crippling supply chain constraints, inflation skyrocketed to a 40-year high of 9.1% in June—pushing the Fed to embark on its most aggressive economic tightening campaign in decades. With the central bank’s rate hikes slowing down the economy, many experts have argued the Fed could be risking an unnecessary recession, but others aren’t so sure inflation has slowed enough. In a note to clients this week, BlackRock analysts said they expect inflation will continue to run hot this year. “Even with a recession coming, we think we are going to be living with inflation,” they wrote. “We do see inflation cooling as spending patterns normalize and energy prices relent, but we see it persisting above policy targets in coming years.”

What To Watch For

The Fed’s next interest rate announcement is slated for February 1. Economists at Goldman Sachs expect the Fed will deliver quarter-point hikes at their next three meetings and then hold top interest rates at 5.25%, the highest level since 2007, for the rest of the year.

Further Reading

Inflation Hits Nearly One-Year Low (Forbes)

Used Car Prices Post Biggest Drop On Record—And Have ‘Much Further To Fall’ (Forbes)