U.S. inflation eases again. Will 2023 be a ‘year of disinflation’? – National | Globalnews.ca

Rising consumer prices in the United States moderated again last month, boosting hopes of inflation The grip on the economy will continue to loosen this year and will probably require less drastic action by the Federal Reserve to control it.

The government said on Thursday that inflation eased to 6.5 per cent in December compared to 12 months ago. This was the sixth consecutive year-over-year decline. On a monthly basis, prices actually fell 0.1 percent from November to December, the first such drop since May 2020.

The soft readings add to growing signs that the worst inflation in four decades is slowly abating. Still, the Fed doesn’t expect inflation to slow enough until 2024 to get close to its two percent target. The central bank is expected to raise its benchmark rate by at least a quarter-point when it finally meets next. This month’s

Even as it gradually slows, inflation remains a painful reality for many Americans, especially as necessities such as food, energy and rent have soared over the past 18 months.

For now, inflation is falling, with the national average price of a gallon of gas declining from a peak of $5 per gallon in June to $3.27 per gallon as of Wednesday, according to AAA.

The supply chain glitches that used to drive up the cost of goods in the past have now been resolved to a large extent. Consumers have also shifted much of their spending away from material goods and instead toward services such as travel and entertainment. As a result, the price of goods including used cars, furniture and clothing has fallen for two straight months.

Last week’s jobs report for December bolstered the possibility that a recession could be avoided. Even after the Fed raised seven rates last year and inflation was still high, employers added 223,000 jobs in December, and the unemployment rate fell to 3.5 percent, matching the lowest level in 53 years.

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At the same time, average hourly wage growth slowed, which should ease pressure on companies to raise prices to cover their higher labor costs.

Another positive sign for the Fed’s efforts to reduce inflation is that Americans expect prices to decline over the next few years. This is important because so-called “inflationary expectations” can be self-fulfilling: if people expect prices to continue to rise rapidly, they will generally take actions such as demanding higher wages, which will perpetuate higher inflation. Can

On Monday the Federal Reserve Bank of New York said consumers now expect inflation of 5 percent over the next year. This is the lowest it is expected in about 18 months. Over the next five years, consumers expect inflation to average 2.4 percent, just barely above the Fed’s two percent target.

Nevertheless, in their commentary in recent weeks, Fed officials have outlined their intention to raise their benchmark short-term rate by an additional three-quarters of a point to above five percent in the coming months. Such a hike would follow seven hikes last year that nearly doubled mortgage rates and made auto loans and business lending more expensive.

Futures prices suggest investors expect the central bank to be less aggressive and implement only two quarter-point hikes until March, bringing the Fed rate below five percent. Investors also expect the Fed to cut rates in November and December, according to the CME Fedwatch tool.

Fed Chair Jerome Powell has tried to push back against lower hikes this spring and an expected cut through year-end, which could make the Fed’s job harder if investors bid stock prices and lower bond yields . Both trends can support faster economic growth when the Fed is trying to cool it.

Minutes of the Fed’s December meeting noted that none of the 19 policymakers expected to cut rates this year.

Nevertheless, last week James Bullard, president of the Federal Reserve Bank of St. Louis, expressed some optimism that this year, “real inflation will bottom out in inflation expectations,” suggesting that 2023 could be “the year of disinflation.” Is.

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