US inflation edged up to 3.4pc in Dec; Fed Reserve to hold, the cut interest rates

US consumer prices edged up to 3.4 per cent in Dec, but the cool down from historic highs keeps officials on track to hold interest rates steady this month and contemplate cuts later.

Core prices, which strip out volatile food and energy items, rose 0.3 per cent in December from the prior month. Picture: Frederic J Brown/AFP

Americans caught a big break last year as inflation fell by nearly half and paychecks grew, delivering real wage gains in 2023 for the first time in three years.

Inflation’s cool down from historic highs keeps the Federal Reserve on track to hold rates steady later this month and contemplate cutting them later this year.

But consumers aren’t in the clear yet; December’s data showed stubborn lingering pressures that suggest inflation is not fully beaten.

The consumer price index increased 3.4 per cent from a year earlier in December, an acceleration from November’s 3.1 per cent advance, but well down from a 6.5 per cent rise at the end of 2022, the Labor Department said Thursday.

Inflation-adjusted wages rose 0.8 per cent last year, a reversal after two full-year declines and a better gain than the year before the pandemic began.

“The progress on inflation since June 2022 has been remarkable,” said David Kelly, chief global strategist at JP Morgan Asset Management.

“The bottom line is that the most likely path for inflation from here is not upwards or sideways but rather down.”

The rapid cooling of price increases has raised hopes of a soft landing, where inflation can be tamed without a surge in unemployment or a recession.

Americans paid more for rent, auto insurance and dentist visits in December, but less for furniture, toys and sporting goods.

Overall prices climbed 0.3 per cent from the prior month versus a 0.1 per cent gain in November.

Core prices, which strip out volatile food and energy items, rose 0.3 per cent in December from the prior month, the same as November, and increased 3.9 per cent from a year earlier, a slight slowing.

Many Americans remain frustrated after experiencing elevated inflation over the past four years, but they are seeing some relief.

Fed officials aren’t likely to change interest rates when they meet later on January 30-31.

US Federal Reserve Chairman Jerome Powell and his officials are expected to hold rates steady at their monetary policy meeting this month. Picture: Brendan Smialowsky/AFP

They use a separate inflation gauge, the personal-consumption-expenditures price index, to determine whether they are achieving their 2 per cent inflation goal.

That Commerce Department index will be released later this month.

Based on the CPI report, private-sector forecasters say the Fed’s preferred gauge is likely to show core prices rose by no more than 0.2 per cent in December, a level consistent with the Fed’s target.

Inflation using that gauge has fallen to just over 2.5 per cent, a “clearly positive development,” said New York Fed President John Williams in remarks a day earlier.

While he indicated the central bank still has “a ways to go to get inflation back” to the target, he called out “significant progress” bringing down inflation for labour-intensive services, which many economists think will be the most difficult part of the Fed’s inflation fight.

Most officials have indicated that they made their final rate increase last July, when they lifted their benchmark rate to a range between 5.25 per cent and 5.5 per cent, a 23-year high.

Many indicated they will eventually want to lower rates if inflation continues to decline because otherwise, holding rates steady would lead inflation-adjusted or “real” rates to rise, creating an unnecessarily restrictive setting.

Officials anticipated at least three rate cuts this year at their December meeting.

As a result, markets widely expect the Fed’s next move will be to lower rates, with many anticipating the first reduction in March.

Inflation readings in the months to come could have a much bigger bearing on when the central bank makes its first cut.

“It will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2 per cent on a sustained basis,” Williams said.

Americans foresee a slower pace of price gains in the coming years.

That is important because these expectations can be self-perpetuating, since consumers are more likely to demand bigger raises and be more resigned to paying higher prices if they expect high inflation.

Consumers’ median expectation for annual inflation three years from now was 2.6 per cent in December, the lowest since 2020, according to a New York Fed survey.

Stocks slipped after the December CPI report. Picture: Angela Weiss/AFP

Falling prices for many grocery items and a downward trend for fuel costs since touching pandemic highs are important drivers of consumers’ views.

Grocery prices climbed just 1.3 per cent over the past year – around the same as the average increase in the decade before the pandemic – though costs were still up 24.8 per cent from before the pandemic due largely to the 2022 price surge.

Meanwhile, pump prices fell 1.9 per cent in December from a year earlier. More recent data shows that slide has continued in January.

Rental-price gains have also slowed, and economists expect a sharper deceleration in the months ahead.

Still, some sources of underlying price pressure on the services side are proving persistent. Bill Adams, chief economist at Comerica Bank, said the biggest frustration in Thursday’s report was that restaurant prices climbed 5.2 per cent from a year earlier, barely slowing from November’s pace.

“Wages for lower-paid occupations like restaurant jobs are growing faster than the U.S. average, creating price pressures that restaurants are passing on in higher prices,” he said.

Meanwhile, consumer spending has held up well, as easing inflation and strong wage growth boosted purchasing power.

While a promising sign for the economy, this resilience could stall the pace of improvement in inflation, said Pooja Sriram, US economist at Barclays.

– The Wall Street Journal