December inflation report: Price increases expected to remain subdued
Consumer price data released Thursday morning is expected to provide policymakers at the Federal Reserve, the White House and U.S. households with new evidence that inflation has continued to slow. Yet some of the report’s details could also reveal bumps in that progress — a warning that it’s too early to declare victory in the battle against rapid price increases.
The Consumer Price Index, an inflation measure compiled by the Department of Labor, is expected to be released at 8:30 a.m. Eastern. The Fed sets its inflation target – 2 percent per year – based on a separate measure, but this one is related and more timely. It will give economists a first clear look at how inflation behaved as 2023 came to a close.
Inflation probably rose slightly faster in December than in November on an annual basis: 3.2 percent, economists expect in a Bloomberg survey, compared to 3.1 percent previously. That revival will probably come because energy prices weigh less heavily than in November.
But after excluding volatile food and fuel prices to get a sense of the underlying inflation trend, a ‘core’ inflation measure is likely to have risen 3.8 percent over the year to December, compared with 4 percent earlier. That would be the first time that the core index has fallen below 4 percent since May 2021.
Continued progress in reducing inflation would be welcome news for central bankers and President Biden, after nearly three years of rapid price increases that have driven up costs for consumers and strained the budgets of many households.
Fed officials have raised rates significantly to slow the economy and try to control inflation: Their key policy rate now stands at 5.25 to 5.5 percent, up from near zero in early 2022. But With inflation cooling, central bankers could start cutting rates this year.
Their job is to balance two goals. On the one hand, they want to ensure that inflation is completely under control. On the other hand, they don’t want to keep borrowing costs too high for too long, threatening a recession that would cost jobs and increase unemployment.
Policymakers have indicated they could cut interest rates three times this year. They are not ready to completely rule out the possibility of another rate hike before reversing course, but investors and many economists think their next step will be to cut rates – perhaps as soon as March.
For consumers, the drop in inflation means that prices for many everyday purchases – from goods like furniture to services like rent – are no longer rising as sharply. Some products, such as used cars, are actually falling in price, although for the most part the price level is still higher than it was a few years ago.
Still, wages are rising at a strong pace, which should help consumers catch up. The average hourly wage was climb faster than the total consumer price index since last summer, on an annual basis.