US inflation cools as consumer prices fall;  labor market remains tight

US inflation cools as consumer prices fall; labor market remains tight

  • Consumer prices fall 0.1% in December
  • The CPI rises 6.5% year-on-year
  • Core CPI up 0.3%; 5.7% year-on-year
  • Weekly jobless claims fall from 1,000 to 205,000

WASHINGTON, Jan 12 (Reuters) – U.S. consumer prices fell for the first time in more than two and a half years in December amid falling gasoline and motor vehicle prices, offering the hope that inflation is now on a sustained downward trend, although the labor market remains tight.

Americans got some relief at the grocery store, too, as Thursday’s Labor Department report showed food prices posted their smallest monthly rise since March 2021. But rents remained sky-high and utilities were low. more expensive.

The report could allow the Federal Reserve to further reduce the pace of its interest rate hikes next month. The US central bank is in the midst of its fastest rate-raising cycle since the 1980s.

“The peak of the inflation mountain is behind us, but the question is how steep the hill is down,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University in Los Angeles. “Certainly the efforts of the Federal Reserve have begun to bear fruit, although it will be a while before the promised land of a 2% inflation rate is here.”

The consumer price index fell 0.1% last month, the first drop since May 2020, when the economy was reeling from the first wave of COVID-19 cases. The CPI rose 0.1% in November.

Economists polled by Reuters had forecast the CPI would be unchanged. It was the third consecutive month that the CPI was below expectations.

Gasoline prices fell 9.4% after falling 2.0% in November. But the cost of natural gas increased 3.0%, while electricity rose 1.0%. Food prices rose 0.3%, the smallest gain since March 2021, after rising 0.5% the previous month. The cost of food consumed at home increased 0.2%.

In the 12 months to December, the CPI rose 6.5%. That was the smallest increase since October 2021 and followed a 7.1% advance in November. The annual CPI peaked at 9.1% in June, which was the largest increase since November 1981. Inflation remains well above the Federal Reserve’s 2% target.

Price pressures are easing as higher borrowing costs cool demand and bottlenecks in supply chains ease. Last year, the Fed raised its policy rate by 425 basis points from near zero to a range of 4.25% to 4.50%, the highest since late 2007. In December, it projected at least an additional 75 basis points. of increases in borrowing costs by the end of 2023.

Excluding the volatile food and energy components, the CPI rose 0.3% last month after rising 0.2% in November. In the 12 months to December, the so-called core CPI increased 5.7% after advancing 6.0% in November.

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

Reuters charts

DEFLATION OF COMMODITIES

Used car and truck prices fell 2.5%, posting their sixth straight monthly decline. New motor vehicles fell 0.1%.

Goods prices fell 1.1% after falling 0.3% in November as deflation in this category takes hold. But services, the largest component of the CPI basket, rose 0.6% after advancing 0.3% in November.

They are being driven by rigid rents. Owners’ equivalent rent, a measure of how much owners would pay to rent or earn from renting out their property, rose 0.8% after rising 0.7% in November. However, independent measures suggest that rental inflation is cooling off.

Rent measures in the CPI tend to lag independent indicators. Healthcare costs rose 0.1% after two consecutive monthly declines. Even excluding rental housing, services inflation spiked 0.4% after remaining unchanged in November.

Even so, the moderation in inflation will be welcomed by Fed officials, although they will probably want to see more convincing evidence of easing price pressures before pausing rate hikes.

The labor market, which has remained tight, will be key in this regard. The unemployment rate has returned to a five-decade low of 3.5%. 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 ending Jan. 7. Economists had forecast 215,000 applications for the past week.

Part of the surprise drop in claims reflects challenges adjusting data for seasonal fluctuations early in the year. However, applications 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 labor during the pandemic. However, they expect claims to rise in the second half of the year as higher borrowing costs stifle demand and push the economy into recession.

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

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

Reporting by Lucía Mutikani; Edited by Chizu Nomiyama and Andrea Ricci

Our standards: Thomson Reuters Trust Principles.

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