U.S. inflation cooling as consumer prices fall; labour market still tight

U.S consumer prices fell for the first time in more than 2 1/2 years in December amid declining prices for gasoline and motor vehicles, offering hope that inflation was now on a sustained downward trend, though the labour market remains tight.

Americans also got some relief at the supermarket, with the report from the Labor Department on Thursday showing food prices posting their smallest monthly increase since March, 2021. But rents remained very high and utilities were more expensive.

The report could allow the Federal Reserve to further scale back the pace of its interest-rate increases next month. The U.S. central bank is engaged in its fastest rate-hiking cycle since the 1980s.

“The mountain peak of inflation is behind us but the question is how steep the downhill is,” said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles. “To be sure, the efforts by the Federal Reserve have begun to bear fruit, even though it will be a while before the promised land of a 2-per-cent inflation rate is here.”

The Consumer Price Index dipped 0.1 per cent last month, the first decline since May, 2020, when the economy was reeling from the first wave of COVID-19 cases. The CPI rose 0.1 per cent in November.

Economists polled by Reuters had forecast the CPI unchanged. It was third straight month that the CPI came in below expectations.

Gasoline prices tumbled 9.4 per cent after dropping 2.0 per cent in November. But the cost of natural gas increased 3.0 per cent, while electricity rose 1.0 per cent. Food prices climbed 0.3 per cent, the smallest gain since March, 2021, after rising 0.5 per cent in the prior month. The cost of food consumed at home increased 0.2 per cent.

In the 12 months through December, the CPI increased 6.5 per cent. That was the smallest rise since October, 2021, and followed a 7.1-per-cent advance in November. The annual CPI peaked at 9.1 per cent in June, which was the biggest increase since November, 1981. Inflation remains well above the Fed’s 2-per-cent target.

Price pressures are subsiding as higher borrowing costs cool demand, and bottlenecks in the supply chains ease. The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25-per-cent to 4.50-per-cent 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 per cent last month after rising 0.2 per cent in November. In the 12 months through December, the so-called core CPI increased 5.7 per cent after advancing 6.0 per cent in November.

U.S. stocks opened higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.

Prices for used cars and trucks fell 2.5 per cent, recording their sixth straight monthly decline. New motor vehicles slipped 0.1 per cent.

Goods prices dropped 1.1 per cent after decreasing 0.3 per cent in November as deflation in this category becomes entrenched. But services, the largest component of the CPI basket, accelerated 0.6 per cent after gaining 0.3 per cent in November.

They are being driven by sticky rents. Owners’ equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, jumped 0.8 per cent after rising 0.7 per cent in November. Independent measures, however, suggest rental inflation is cooling.

The rent measures in the CPI tend to lag the independent gauges. Health care costs gained 0.1 per cent after two straight monthly declines. Even stripping out rental shelter, services inflation shot up 0.4 per cent after being unchanged in November.

Still, the moderation in inflation will be welcomed by Fed officials, though they will probably want to see more compelling evidence of abating prices pressures before pausing rate hikes.

The labour market, which has remained tight, will be key in this regard. The unemployment rate is back at a five-decade low of 3.5 per cent. There were 1.7 jobs for every unemployed person in November.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 205,000 for the week ended Jan. 7. Economists had forecast 215,000 claims for the latest week.

Part of the surprise drop in claims reflects challenges adjusting the data for seasonal fluctuations at the start of the year. Nevertheless, claims have remained low despite high-profile layoffs in the technology industry as well as job cuts in interest rate-sensitive sectors such as finance and housing.

Economists say companies are for now reluctant to send workers home after difficulties finding labour during the pandemic. They, however, expect claims to rise by the second half of the year as higher borrowing costs choke demand and push the economy into recession.

The claims report also showed the number of people receiving benefits after an initial week of aid, a proxy for hiring, dropped 63,000 to 1.634 million in the week ending Dec. 31.

The government reported last week the economy created 223,000 jobs in December, more than double the 100,000 that economists say the Fed wants to see to be confident inflation is cooling.